Turkey Surprises With No Rate Cut for First Time in a Year

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Turkey’s central bank held off on cutting interest rates for the first time since Governor Murat Uysal took over in July, unexpectedly offering relief for markets amid a worsening inflation outlook and a shrinking rate of return for investors.

The Monetary Policy Committee left its key rate at 8.25% on Thursday, in line with the forecasts of just two economists in a Bloomberg survey. The rest of the 20 analysts predicted another cut.

The MPC cited an increase in core inflation and said food prices have risen because of seasonal factors and the coronavirus pandemic, according to a statement. The lira jumped after the decision, before erasing gains and trading little changed at 6.8552 against the dollar as of 3:01 p.m. in Istanbul.

Turkey Surprises With No Rate Cut for First Time in a Year

“If we take into account that real interest rates are already deep in negative territory due to persistently high inflation, today’s decision is actually fully rational,” said Piotr Matys, a strategist at Rabobank in London. “The key question is whether it is a pause in the easing cycle or the end of it.”

Interrupting the easing cycle carries risks for Uysal, whose predecessor was fired by Erdogan for not reducing rates. Contrary to the thinking of most economists and central banks, Erdogan believes lower borrowing costs are more effective at slowing prices.

But the lira has looked increasingly vulnerable to a global selloff after the central bank delivered 1,575 basis points of easing in nine consecutive steps, leaving Turkey’s inflation-adjusted rates among the lowest in the world. The country’s currency is one of this year’s five worst performers in emerging markets with a loss of about 13% against the dollar.

Turkey Surprises With No Rate Cut for First Time in a Year

Complementing the monetary easing delivered since Uysal’s abrupt appointment last year, the central bank has also been pumping money into the economy at the fastest pace in over a decade to contain the fallout of the coronavirus pandemic.

What Our Economists Say...

“The recent pickup in inflation was likely behind the hawkish turn. We expect the pause to be temporary and rates to fall by 75 basis points in the second half of the year.”

-- Ziad Daoud

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The price outlook has already started to show signs of deterioration. Turkey’s consumer inflation unexpectedly quickened to an annual 11.4% in May, snapping two months of declines, as elevated food costs offset some of the impact from weaker demand.

A rebound in energy markets now “adds upward pressure from here,” according to Barclays economists including Ercan Erguzel, who expected a 50 basis-point rate cut on Thursday to conclude the easing cycle.

The central bank, which says it still provides a “reasonable” real rate of return based on projected price growth, in April lowered its inflation expectations for the end of this year to 7.4%, less than a previous forecast of 8.2%.

In its statement on Thursday, the MPC said it expects the effect of the pandemic on the supply side to fade while “demand-driven disinflationary effects will become more prevalent in the second half of the year.”

©2020 Bloomberg L.P.

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