Turkey Central Bank Says Rates Won’t Be Cut Quickly After Pause


Turkey’s central bank left its benchmark interest rate unchanged at 17% at the first monetary policy meeting of the year, pledging to keep it elevated for an “extended” period. The lira rose.

The Monetary Policy Committee’s decision was in line with the forecasts of most analysts in a Bloomberg survey. The dissenters, including economists at Morgan Stanley and Societe Generale SA, had predicted an increase of 50 to 100 basis points.

The committee “has decided to maintain decisively the tight monetary policy stance for an extended period until strong indicators point to a permanent fall in inflation and price stability,” the bank said in a statement on its website. “Additional monetary tightening will be delivered if needed.”

Turkey Central Bank Says Rates Won’t Be Cut Quickly After Pause

The lira rose as much as 0.7% after the decision and was trading at 7.3710 per dollar at 2:43 p.m. in Istanbul.

Governor Naci Agbal has raised the benchmark one-week repo rate by a cumulative 675 basis points since his appointment in November, bringing inflation-adjusted rates to well above yields offered by emerging-market peers. His decisions to simplify the bank’s funding structure and end unannounced foreign-exchange interventions by state lenders have earned him enough credit to avoid another rate hike despite last month’s jump in inflation.

Thursday’s statement is intended to disperse possible fears that the bank might be tempted to loosen too soon to boost growth.

The “hawkish” statement is a sign policy makers are wary of damaging the economy with premature rate cuts, said Enver Erkan, Istanbul-based economist at Tera Yatirim who ranks second among forecasters of Turkish rate decisions in two years of Bloomberg surveys.

Erdogan Factor

The hawkish turn in forward guidance comes less than a week after President Recep Tayyip Erdogan resumed his criticism of high interest rates, reiterating his economic hypothesis that they cause inflation.

Investors were already skeptical about the Turkish leader’s pledges to follow orthodox policies after his son-in-law Berat Albayrak resigned as economy czar in November. Under Albayrak’s watch, Turkey restricted banks’ lira trade with international institutions while aggressively cutting borrowing costs, triggering a $34 billion outflow of foreign capital from Turkish equities and government bonds.

A hike was needed to respond to “the damaging impact of rhetoric from Turkey’s political leadership,” Phoenix Kalen, London-based director of emerging-market strategy at Societe Generale, said before the decision. She was one of the few analysts to pencil in a 50-basis-point increase.

Turkey Central Bank Says Rates Won’t Be Cut Quickly After Pause

For many analysts, the Turkish Treasury’s $3.5 billion Eurobond sale this week had already bolstered expectations of a pause. If policy makers were considering a hike, they “could have chosen to issue the debt after a retreat in exchange rates and risk premium” following the rates decision, said Evren Kirikoglu, an independent market strategist in Istanbul.

Turkey’s central bank has consistently missed its inflation target since setting it at 5% in 2012. Last year, consumer inflation exceeded even the central bank’s bumped-up forecast, climbing to 14.6% in December. A weak lira and rapid credit growth driven by negative real-interest rates kept price growth in double digits during 2020.

Elevated levels of inflation tend to send Turkish consumers into dollar assets to protect their savings. In 2020, Turkish residents’ foreign-exchange deposits rose by about 22% to $235.7 billion, following a 20% increase the previous year. Strong demand for dollars weakens the lira, creating additional inflationary pressure.

©2021 Bloomberg L.P.

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