Longer Wait Ahead for Turkish Rate Cuts After Inflation Reversal
Pedestrians wear protective face masks in the Eminonu shopping district of Istanbul, Turkey. (Photographer: Kerem Uzel/Bloomberg)

Longer Wait Ahead for Turkish Rate Cuts After Inflation Reversal

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Turkey’s central bank surprised by raising its inflation projections for the end of this year by more than a percentage point, a sign it won’t rush to resume interest-rate cuts after a two-month pause.

Consumer-price growth will finish the year at 8.9%, compared with a previous forecast of 7.4%, Governor Murat Uysal said Wednesday in Ankara as he unveiled the third quarterly inflation report of 2020. The forecast implies that Turkey’s policy rate -- currently at 8.25% -- will be negative for the rest of the year when adjusted for inflation.

It’s the first time this year that the central bank increased its price outlook for 2020. Restrictions imposed to stop the coronavirus are hurting supply chains and driving inflation higher, according to Uysal.

Longer Wait Ahead for Turkish Rate Cuts After Inflation Reversal

Less favorable prospects facing Turkey could mean a longer wait before the central bank resumes an easing cycle that delivered 1,575 basis points of rate cuts in nine consecutive steps since last July. More caution may be warranted now that Turkey’s inflation-adjusted borrowing costs are among the lowest in the world while state lenders unleash credit and policy makers inject liquidity by scooping up government bonds.

“Our current monetary-policy stance is in line with the inflation outlook,” Uysal said.

What Our Economists Say...
“The latest forecast revision was surprising. It indicates that inflation will remain above the policy rate for the rest of the year. With the central bank governor previously looking to provide a ‘reasonable’ rate of real return for investors, the room to ease further is all but non-existent.”

-- Ziad Daoud

Turkey is among several major emerging economies where central banks have recently turned more cautious or moved slower than anticipated in lowering rates. With the lira again coming under pressure in recent days, policy makers may also opt to hold off on easing for longer to avoid leaving the currency even more exposed.

The lira extended losses during the briefing and traded 0.4% weaker against the dollar as of 1:09 p.m. in Istanbul. It was among just three currencies in emerging markets to depreciate on Wednesday and had the worst performance of the group.

Stimulus, Lira

A combination of credit stimulus, currency depreciation and a recovery in energy costs has reversed a deceleration in prices and stoked a pickup in inflation from May.

Annual price growth accelerated for a second month in June to 12.6%. A decline in inflation will start from July, according to Uysal.

Most economists until recently still saw rates falling further this year. But sentiment has started to turn: Barclays Plc changed its call and now sees borrowing costs on hold for the rest of the year, while analysts from JPMorgan Chase & Co. to Goldman Sachs Group Inc. say rates will have to rise soon.

  • Turkey’s central bank projects inflation will reach 6.2% by the end of 2021, an upward revision from 5.4%
  • End-2020 food inflation is estimated at 10.5%, compared with 9.5% previously
  • The central bank’s 2020 average oil price forecast was raised to $41.6 per barrel from $32.6

Survey of

Expectations

Government

Estimate

Central Bank

Projection

Official

Target

Year-end 202010.2%8.5%8.9%5%
Year-end 20216%6.2%5%

The central bank has never met the 5% inflation target since its introduction in 2012. President Recep Tayyip Erdogan, who advocates an unorthodox theory that high rates cause rather than curb inflation, fired Uysal’s predecessor a year ago for not easing policy.

“We see Turkey’s monetary policy as historically ineffective at managing inflation,” S&P Global Ratings said in a report last week. “The central bank has faced increasing political pressure in recent years, which we consider impairs its effectiveness, often by delaying timely responses to rising inflation.”

©2020 Bloomberg L.P.

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