Turkey to Extend Rate Pause Amid Lira Rally

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Turkey’s central bank is expected to hold interest rates for a second month as it waits out an upswing in inflation while the lira rallies.

All but three of the 25 economists surveyed by Bloomberg predict borrowing costs will stay steady at 17% on Thursday. The lira has jumped a world-leading 23% against the dollar since President Recep Tayyip Erdogan overhauled his economic policy team in November, installing a market-friendly central bank governor who won over investors with rate hikes, policy simplification and hawkish pledges.

Turkey to Extend Rate Pause Amid Lira Rally

Although inflation quickened for a fourth month to 15% in January, on the lingering impact of last year’s lira depreciation and rapid credit growth, most economists say Governor Naci Agbal can get away with keeping the key rate unchanged.

Yet while inflation overshoot is now within the central bank’s prediction range, it will accelerate further, forcing an additional policy interest rate hike of 100 basis points by the end of April, Morgan Stanley analysts including Alina Slyusarchuk wrote in an emailed note.

Another reason to stand pat is the slowing credit growth. The pace of annual lending expansion has been below inflation over the past two months. The boom in lending has been fizzling out since a decision in November to remove a rule that pressured banks to extend credit.

Central BankReal Rate*Next Meeting
Malaysia3.15%March 4
Turkey2.03%Feb. 18
Mexico0.46%March 25
South Africa0.40%March 25
Russia-0.94%March 19
U.S.-1.15%March 17
Euro Region-1.40%March 11
Brazil-2.56%March 17

*Central bank’s benchmark interest rate minus realized inflation

Source: Central bank and official data, Bloomberg

Meantime, the currency’s carry appeal prevails. Turkey’s real rate of about 2% is among the highest in emerging markets and will likely remain positive even if inflation accelerates.

“Even though market-implied pricing shows around a 30 basis points hike at the February meeting, a hawkish hold would be in line with how investors are positioned,” Morgan Stanley analysts said.

©2021 Bloomberg L.P.

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