Turkish Inflation to Rule Out Erdogan’s Summer Rate Cut

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Turkey’s central bank is expected to keep interest rates unchanged for a fourth month Wednesday, as a weak lira and rising prices make a reduction in borrowing costs unlikely before the last quarter.

All 21 economists surveyed by Bloomberg predicted borrowing costs would be held at 19%. Turkish inflation accelerated faster than all estimates in June due to rising global commodity prices and the easing of a strict lockdown, reducing the likelihood of the interest-rate cut sought by President Recep Tayyip Erdogan for July or August.

Key Insights

With inflationary risks seen extending into July, a separate survey of 14 analysts showed that most expect a rate cut in the final three months of 2021. Four said the central bank would start monetary easing in the third quarter, while one dissenter argued the bank would wait until January and another said it would cut in August.

Turkish Inflation to Rule Out Erdogan’s Summer Rate Cut

The lira has weakened more than 15% against the dollar since bank Governor Sahap Kavcioglu took over in March, even though he’s pledged to maintain a positive rate when adjusted for realized and expected inflation and to maintain tight policy until the bank’s 5% inflation target is achieved.

What Economists Say

Morgan Stanley analysts including Alina Slyusarchuk see the first 100 basis-point cut in September, “when inflows related to tourism provide some support to the FX market.” However, if inflation keeps surprising on the upside, there might be a smaller 50 basis-point reduction or monetary easing could be postponed until the fourth quarter, she said in an emailed note.

“Given the significant rise in inflation and inflation expectations in July, we believe there is no room to cut the policy rate in the near term,” Deutsche Bank economist Fatih Akcelik said. “We maintain our expectation for the easing cycle to begin in October” with a 50-basis-point cut, he said.

Coming Up

A central bank survey in July showed market participants expect headline inflation to end the year at 15.6%, above its own forecast of 12.2%. The monetary authority will update its own base-case scenario for prices through the rest of 2021 and the following two years on July 29. July inflation data will be released Aug. 3.

©2021 Bloomberg L.P.

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