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Turkey Takes Another Step to Rate Cuts by Tossing Hawkish Pledge

The dovish turn by global central banks could tempt Turkey to follow suit.

Turkey Takes Another Step to Rate Cuts by Tossing Hawkish Pledge
A clerk displays a selection of 50 Turkish lira banknotes at a currency exchange bureau in this photo in Turkey. (Photographer: Kostas Tsironis/Bloomberg)

(Bloomberg) -- Turkey held interest rates for the ninth month as the central bank moves closer to resuming cuts with a slowdown in prices.

Having already laid the groundwork for a less hawkish attitude in April, Governor Murat Cetinkaya took another step on Wednesday by dropping a pledge to “maintain the tight monetary stance until the inflation outlook displays a significant improvement.” The central bank replaced it with an explanation that policy was kept tight “to contain the risks to the pricing behavior and to reinforce the disinflation process.”

The Monetary Policy Committee also kept its benchmark at 24% on Wednesday, in line with the forecasts of most economists surveyed by Bloomberg.

“These changes are paving the way for easing,” said Inan Demir, an economist at Nomura International Plc in London. “However, ultimately, domestic and international political risks will determine whether the central bank will find the opportunity to ease.”

Turkey Takes Another Step to Rate Cuts by Tossing Hawkish Pledge

The central bank may not yet be in the clear because a controversial rerun of Istanbul elections looms in less than two weeks, compounded by tensions with the U.S. that could plunge Turkey into renewed turmoil. But gains in the lira may eventually be enough to prompt policy makers to cut rates in the coming months, especially now that a slowdown in inflation is becoming entrenched. Adjusted for prices, rates in Turkey are about double the level among peers such as Russia and South Africa.

The lira traded stronger against the dollar after the rate decision, extending the best performance in emerging markets over the past month. It was trading 0.1% higher against the dollar at 5.7937 as of 2:32 p.m. local time. Investors anticipate the Turkish currency will remain among the world’s most unstable, with its three-month implied volatility the highest globally.

What Our Economists Say...

“The language change by the central bank is paving the way for easing in the second half. Economic conditions could support cutting rates, assuming no escalation in tensions with the U.S. and a smooth rerun of Istanbul’s mayoral elections.”

--Ziad Daoud, Mideast economist

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The case for monetary easing in Turkey is also improving thanks to the dovish turn by global central banks. The Federal Reserve and the European Central Bank are sounding more open to stimulus, while their counterparts in India and Australia already cut rates.

Turkey Takes Another Step to Rate Cuts by Tossing Hawkish Pledge

For now, inflation remains more than triple the official target of 5%, limiting the central bank’s options as the lira faces a choppy outlook. Treasury and Finance Minister Berat Albayrak is more upbeat, predicting price growth will be in single digits in September to October after slowing for a second month in May.

In another change in the central bank’s statement, it removed the sentence that focused on risks to price stability from higher food and import prices as well as elevated inflation expectations.

“Assuming no major move in the dollar-lira pair in the upcoming period, this is preparation for a rate cut,” Morgan Stanley economist Ercan Erguzel said in a research note. The central bank will likely deliver decreases of 100 basis points both in July and September, according to Erguzel.

--With assistance from Harumi Ichikura.

To contact the reporter on this story: Cagan Koc in Istanbul at ckoc2@bloomberg.net

To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, ;Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky

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