Turkey Keeps Hawkish Rate Bias as Pause Extended Before Vote

(Bloomberg) -- Turkey’s central bank held interest rates for a fourth meeting and left its commitment to higher borrowing costs unchanged as it waits out the remaining weeks before local elections.

The Monetary Policy Committee led by Governor Murat Cetinkaya left its benchmark at 24 percent on Wednesday, in line with the forecasts of all 25 economists surveyed by Bloomberg. The central bank, which has stood pat since an increase of 625 basis points in September, reiterated that “further monetary tightening will be delivered” if needed. The lira rallied briefly after the announcement before reversing gains.

“Risks to price stability continue to prevail,” it said in a statement. “Accordingly, the Committee has decided to maintain the tight monetary policy stance until the inflation outlook displays a significant improvement.”

Turkey Keeps Hawkish Rate Bias as Pause Extended Before Vote

Pressured for years by President Recep Tayyip Erdogan to keep borrowing costs low, the central bank has enjoyed a period largely free of political interference since a currency crisis last summer. Policy makers have focused on rebuilding their credibility after hesitating to raise rates aggressively in 2018 and acting only after the Turkish currency buckled.

Facing bellwether municipal elections later this month and annual inflation still near 20 percent, the government has resorted to battling price pressures directly, cracking down on hoarding and selling discounted food. The recent runup in food costs disproportionately hurt the base of the president’s ruling party among the poorer sections of the country’s 82 million people.

What Our Economists Say...

“The central bank may have been reluctant to surprise financial markets with a cut just ahead of elections. But with inflation falling and the economy slowing, we still expect it to lower rates in the first half of this year.”

--Ziad Daoud, Bloomberg Economics

For more, see his TURKEY REACT

Economists predict that the central bank won’t start easing before the next quarter and will deliver 475 basis points of cuts by the end of the year. The lira’s two-month forward implied yield suggests the market is pricing a rate decrease of 50 to 75 basis points at the next meeting on April 25.

The Turkish currency initially strengthened as much as 0.4 percent after the rate decision but reversed course and traded 0.4 percent weaker at 5.41 against the dollar at 2:36 p.m. in Istanbul.

Turkey Keeps Hawkish Rate Bias as Pause Extended Before Vote

Meanwhile, Cetinkaya is waiting for what he called a “convincing” deceleration in price growth before resuming monetary easing. Headline inflation in February slowed to an annual 19.7 percent from 20.4 percent in the previous month. The central bank last lowered the cost of funding for commercial lenders in 2016.

The question is how long Erdogan will give the central bank free rein.

The economy is sinking into its first recession in a decade as Turkish companies endure higher borrowing costs and loan growth remains sluggish. The lira is another concern. It’s depreciated against the dollar for four straight weeks, losing about 3 percent in one of the worst performances in emerging markets.

“There is not yet any noticeable improvement in inflation dynamics which would suggest that the Turkish central bank should even consider rate cuts,” Commerzbank AG analysts including Tatha Ghose said in a note before the decision.

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