Turkey Will Likely Hold Rates But Could Change Guidance

Turkey’s central bank is expected to keep its benchmark interest rate steady Thursday, with accelerating inflation leaving little room for a reduction in borrowing costs sought by President Recep Tayyip Erdogan.

All 20 economists surveyed by Bloomberg predicted the policy rate would be held at 19% after Turkish consumer inflation climbed more than expected in July.

Key Insights

The deteriorating inflation outlook has left few options available to Governor Sahap Kavcioglu, who pledged on July 29 to keep the one-week repo rate above the annual pace of price increases.

Erdogan renewed his call for lower interest rates last week. The currency dropped more than 2% after the comments, bringing losses since Kavcioglu’s appointment in March to over 16%, the worst performance among emerging market peers tracked by Bloomberg.

For Kavcioglu to deliver the rate cut sought by Erdogan, he would either have to contradict his forward guidance or wait for price gains to cool. He could also change the guidance to say the bank will offer a positive real yield when adjusted for expected inflation, replacing the current guidance for a positive yield over current inflation.

The recent depreciation suggests, however, that any change to the monetary policy outlook might derail the relative stability the lira had enjoyed since June.

Turkey Will Likely Hold Rates But Could Change Guidance

What Economists Say

“We expect consumer inflation to remain elevated at 19%” because of a higher base of comparison in food and begin to ease in November, Deutsche Bank economist Fatih Akcelik said in an emailed report.

“We postponed our expectation for the start of the easing cycle from October to November. We expect two 50-basis-point cuts” in each of those months, he added.

“There is absolutely no room for a rate cut,” according to Selva Demiralp, a professor of economics at Istanbul’s Koc University. “That being said, there has been a chronic gap between what the central bank should do versus what they will do for a long time now.”

Changing sentiment in developed markets and expectations of a tightening in monetary policy there will continue to put pressure on the lira, making it too risky for the central bank to deliver a premature rate cut to please the president, she said.

Coming Up

Turkey’s central bank raised its inflation expectations in its latest quarterly report on July 29 but projected a significant drop in price growth in the final quarter. The bank expects inflation to finish 2021 at 14.1%, well below the 16.3% median estimate in the central bank’s latest monthly survey of market participants.

©2021 Bloomberg L.P.

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