(Bloomberg) -- Turkey’s central bank left its benchmark interest rate unchanged for an eighth month, while implying a cut could soon be justified due to slowing inflation.
The Monetary Policy Committee, led by Governor Fatih Karahan, kept the one-week repo rate at 50%, in line with a Bloomberg survey in which all analysts predicted a hold.
Commenting on the wider economic backdrop, the central bank highlighted improving services inflation alongside expectations of more manageable price increases.
“The level of the policy rate will be determined in a way to ensure the tightness required by the projected disinflation path, taking into account both realized and expected inflation,” the MPC said in a statement accompanying Thursday’s decision.
That “could be an important clue that a rate cut is coming,” said Piotr Matys, a senior analyst at in Touch Capital Markets. “With inflation decelerating, monetary policy would be still restrictive when the central bank starts cutting interest rates, assuming that it’s not a very aggressive easing cycle,” he said.
The Borsa Istanbul Banks Index extended gains to as much as 5.6% and was up 5.1% as of 3:47 p.m. in Istanbul. Two-year government bonds advanced, with the yield reversing earlier gains to drop 90bps to 41.6%. The lira trimmed losses to trade little changed at 34.48 per US dollar.
Recent higher-than-expected inflation data had clouded the outlook for Turkey’s monetary policy, with analysts divided on whether a rate cut could be possible next month or into the new year. Ahead of the decision, private lender Isbank’s Chief Executive Officer Hakan Aran said if month-on-month inflation in November is below 2%, that could allow for a 250bps reduction in December.
“We think the central bank is preparing for a rate cut in December or January,” economist Hande Sekerci of Is Portfoy said. “Though the possibility of a limited cut increases for December, we think this’ll be based on November inflation.” According to Sekerci, headline inflation this month could remain relatively high over vegetable, medicine and clothing prices.
Prices rose an annual 48.6% last month, though the central bank focuses on seasonally-adjusted data. It said on Thursday that the underlying trend of inflation showed a decline in October.
What Bloomberg Economics Says...
“We see policymakers kicking off a gradual easing cycle in December with a 250-basis-point trim. Risks to this outlook are tilted toward smaller or delayed cuts given the potential for higher price pressures especially in energy costs.”
— Selva Bahar Baziki, economist. Click here to read more.
Earlier this month, Karahan said future cuts would only follow improvements in inflation trends, while emphasizing that tightness would be preserved even if officials began lowering borrowing costs.
He also revised up inflation projections, seeing price rises of 44% at the end of 2024, up from an original forecast of 38%.
High borrowing costs have put pressure on Turkish companies, with influential business association Musiad calling for monetary easing even if it’s a “symbolic” cut.
President Recep Tayyip Erdogan, who’s known for his aversion to high borrowing costs, also spoke about monetary policy after months of silence, giving a cryptic message that “both inflation and borrowing costs will fall.”
Erdogan has pushed central bankers to lower rates in the past — regardless of inflation — to spur economic growth and removed those who didn’t toe the line.
With a debate on next year’s minimum-wage raise looming, more attention is also being paid to complementary fiscal steps to help bring inflation down. The central bank highlighted Thursday that “increased coordination of fiscal policy will also contribute significantly” to bringing down price growth.
On Wednesday, Erdogan pledged that minimum wage increases will continue to outpace inflation next year and that workers’ purchasing power will be safeguarded.
--With assistance from Joel Rinneby, Tugce Ozsoy and Baris Balci.
(Updates with more details from statement, economist comment, background as of 15th paragraph.)
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