Turkey Set to Cut Rates Even as the Lira Bleeds
Turkey will likely deliver another interest-rate cut Thursday despite a leap in the outlook for inflation and a sliding currency, falling in line with President Recep Tayyip Erdogan’s controversial push to re-engineer the economy.
All but one of 22 economists surveyed by Bloomberg expect the central bank led by Governor Sahap Kavcioglu to lower its benchmark one-week repo, with a median forecast for a reduction of 100 basis points to 14%. The single dissenter sees a hold.
The bank has lowered rates by 400 basis points since September, a period when many counterparts were mulling or implementing hikes to tame a spike in price pressures. The cuts have driven down the lira. It weakened past 15 per dollar for the first time ever on Thursday as investors anticipated further easing. The currency’s now lost nearly half its value this year.
Officials have signaled future policy. Finance Minister Nureddin Nebati said this week Turkey’s determined to not raise interest rates. While Kavcioglu told an analysts’ call this month that the bank would consider halting its series of cuts following the December meeting, according to an official with the direct knowledge of the matter.
Erdogan’s distaste for higher borrowing costs has been linked to Islamic proscriptions on usury. In his view, producers have to pass on the interest they pay to customers, so they raise prices.
He fired Kavcioglu’s three immediate predecessors for raising rates to tame inflation, and stepped up calls for cheaper borrowing as his popularity fell amid the pandemic. Prices continued spiraling, with annual consumer inflation accelerating to 21.3% in November. Erdogan sacked two senior finance officials, decree in the official gazette showed on Thursday.
The president has attacked what he brands the flow of fickle “hot money” -- speculative foreign inflows into Turkish securities -- attracted by high interest rates and a strong lira. According to his economic model, cheaper borrowing will boost manufacturing and create jobs while inflation eventually stabilizes.
Recent rate cuts sent real yields deeper into negative territory as consumer inflation climbed. Inflation expectations for the next 12 months surged to 21.39% from 15.61%, according to the central bank’s December survey of market participants.
What Analysts Say
The bank might complete its easing cycle Thursday, citing the record deterioration in inflation expectations, Deutsche Bank economist Fatih Akcelik said. “Although an emergency rate hike would likely be more difficult to implement this time around, we believe that the markets will force the CBRT to hike its policy rate to at least 25%,” by the end of the first quarter due to ongoing dollarization, lira weakness and rising inflation, Akcelik said.
“We don’t expect abrupt policy transformation before the results of the new economic perspective are seen in a few months,” said Tera Menkul Degerler economist Enver Erkan, who sees 25-basis-point cut. Erkan said he’s not sure if eventually “there will be a hawkish balancing.”
The central bank’s expected to publish its overview of monetary and exchange rate policy for 2022 before the end of the year. The statistics agency will publish December inflation data on Jan. 3.
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