Britain's Financial Times said Tuesday Turkey's economy has ran out of steam in the second quarter of this year as growth fell to its slowest pace in five years, setting a further test for the government's economic policies at a time when the international environment is deteriorating.

It said that decline in economic growth could open the way for the Central Bank to cut interest rates later this year, and economists expect growth to pick up again soon.

"But, added to a high current account deficit, the impact of a drought and criticism from business leaders of an 'unambitious' reform program, it is unwelcome news for Prime Minister Recep Tayyip Erdogan's new and largely untested economics team," it continued.

Pointing out the importance of International Monetary Fund (IMF) delegation's visit to Ankara to meet the new ministers appointed by Prime Minister Recep Tayyip Erdogan, Financial Times said, "most eyes will be on Mehmet Simsek, the former Merrill Lynch economist who was named treasury minister and whose tasks include being the chief interlocutor with the IMF."

FT quoted Simsek as saying the government would focus on micro-economic reforms to boost productivity and would stick to a tight fiscal policy to reduce Turkey’s indebtedness.

The need for micro-level reforms was highlighted by the slowdown in the economy in the three months to June. Gross domestic product rose 3.9 percent in the period, down from 6.8 percent in the first quarter. The growth rate for the first half of 2007 was 5.3 percent, although it was 7.5 percent in the same period last year.

"The main reasons for the decline were a rise in political instability ahead of parliamentary and presidential elections, which persuaded companies to rein in their investment programs, and a slump in consumer spending because of persistently high interest rates," it said and added that interest rates could begin to fall in the fourth quarter of 2007.

The Turkish Central Bank raised interest rates by 425 basis points in summer 2006 to counter the impact of an unexpected rise in inflation.

FT quoted analysts as saying Monday that interest rates could begin to fall in the fourth quarter of 2007. Economists at Ekspres Invest, the brokerage, suggested the bank could cut them by up to 100 basis points.

However, FT said others pointed to the international credit squeeze and its potential impact on investing in emerging markets. It said Turkey has been a big beneficiary of favourable sentiment towards emerging markets in the past two years and is exceptionally vulnerable to any shift in investors’ appetite for risk.