(Bloomberg) -- Turkey’s central bank extended its interest-rate pause for a fifth month and said it was placing even more importance on expectations for prices before discussing easing.
The Monetary Policy Committee, led by Governor Fatih Karahan, kept the one-week repo rate at 50% on Tuesday, in line with the forecasts of all economists surveyed by Bloomberg.
“The alignment of inflation expectations and pricing behavior with projections has gained relative importance for the disinflation process,” the MPC said.
The lira slipped 0.3% to 33.84 per US dollar at 3:30 pm in Istanbul. The benchmark Borsa Istanbul 100 Index reversed earlier gains and was down 0.8%.
Officials want to slow year-on-year inflation, now at 62%, to 38% by the end of December. Markets see it being closer to 42%, the upper end of the central bank’s projections, by that stage.
Turkish households and businesses have had elevated expectations compared to markets and the central bank, translating into stronger domestic demand and shaping their outlook of prices.
“Until expectations improve significantly, we continue to think that the central bank will refrain from taking risks that would in return create fresh inflation risks on exchange rates and loans,” said Evren Kirikoglu, economist at Istanbul-based GCM Yatirim. According to Kirikoglu, discussions on easing could be on the table in December.
The monetary authority has repeatedly said that it wants expectations to converge with its own outlook before discussing any potential rate cuts. The other gauge it’s tracking closely is monthly inflation.
The MPC reiterated it would maintain its tight monetary stance until “a significant and sustained decline in the underlying trend of monthly inflation is observed.”
Policymakers noted that domestic demand was slowing and its inflationary impact was “diminishing.” Still, services inflation remains sticky, it said.
The central bank has embarked on a U-turn since June last year, when it began a series of rate hikes that ended an era of ultra-loose monetary policy championed by President Recep Tayyip Erdogan. The change happened as Erdogan and his officials sought to bring back foreign investors that fled Turkish markets when inflation soared.
While tighter monetary and fiscal policies have won plaudits from bond and stock investors, in recent months the central bank has had to contend with a decline in lira deposit rates. That’s prompting some Turks to buy dollar assets again and is going some way to countering the central bank’s measures to combat inflation, according to Goldman Sachs Group Inc. economists including Clemens Grafe.
“If it continues, dollarization is likely to delay the easing of the monetary policy,” they said in a note to clients.
What Bloomberg Economics Says...
“We see the further hawkish tilt in the policymakers’ guidance — which also matched our call — as an effort to discourage the pricing in of a premature rate cut. Based on the central bank’s criteria for the inflation trend and expectations, we think policymakers will wait until November to start the easing cycle.”
— Selva Bahar Baziki, economist. Click here to read more.
Discussions about the timing of rate reductions are likely to intensify next month as an economic slowdown sets in further. A measure of Turkish manufacturing activity has been below 50, the threshold that separates expansion from contraction, for the last four months. Industrial production is falling in annual terms and unemployment is rising.
Cem Cakmakli, associate professor of economics at Koc University, said the central bank’s hawkish statement was a response to speculation that rate cuts could be on the table soon over the slowdown in economic activity and rise in unemployment. “I think rate cuts should come in 2025 if monthly inflation slows for three to four straight months,” he said.
However, should monthly inflation come at 1% or 1.5% in August or September, and if unemployment continues to rise, there could be pressure on the central bank to lower rates this year, Cakmakli said. He added that as a result his “base case scenario includes a cut this year.”
--With assistance from Tugce Ozsoy.
(Updates with economist quotes, chart.)
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