(Bloomberg) — Turkey extended an interest rate pause in place since April, with the central bank telegraphing a tough path as it stands on alert for risks to inflation that just peaked above 75%.
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The Monetary Policy Committee led by Governor Fatih Karahan left the one-week repo rate at 50% on Thursday, in line with the forecasts of all economists polled by Bloomberg. The MPC reiterated that its policy will remain tight “until a significant and sustained decline in the monthly core inflation trend”, according to a statement.
The Turkish currency fell against the dollar and traded little changed after the decision. Lira-denominated 10-year government bond yields extended their decline to seven basis points to 28.58%.
“In case of unforeseen developments in credit and deposit markets,” the center said it could introduce “additional macroprudential measures.”
“Liquidity conditions are closely monitored,” he said. “Sterilization will be implemented effectively while also enriching the toolkit whenever needed.”
Rate cuts are likely to remain off the table for most of the year as Turkish policymakers project an economic slowdown to reduce one of the world’s highest inflation rates. An aggressive cycle of monetary tightening that began a year ago is only now beginning to moderate growth, in part because tighter financial conditions were out of sync with generous fiscal measures, such as sharp wage increases enacted by the government.
But as fiscal policy tightens, an economic cooling is beginning to settle over Turkey to put inflation on track to start slowing and reach around 72% in June. Officials target inflation at 38% at the end of the year.
A measure of Turkish manufacturing activity has been below the 50 point that separates expansion from contraction for two months, and factories are using less of their potential than at any time since last August. Pessimism among businesses is also on the rise, according to a Central Bank survey.
“The central bank is committed to maintaining its tight monetary stance and inflation is finally starting to fall in June,” said Tufan Comert, director of global markets strategy at BBVA in London. Policymakers are managing lira liquidity “carefully, so we don’t see the need for action in the near term,” he said.
The trajectory of prices will dictate the appeal of domestic assets to investors returning to Turkey on the expectation that its embrace of more conventional policies will make it less prone to inflation crises.
A key risk to the central bank’s outlook is how the government handles the blow from tougher policies on companies and households. The main opposition party has called for an increase in the minimum wage in the middle of next year, an adjustment made by the government in recent years to compensate for inflation.
Labor Minister Vedat Isikhan said on Wednesday that Turkey has definitively ruled out such an increase. This would avoid boosting domestic demand and inflationary pressures, as happened after a 49% increase earlier this year.
What Bloomberg Economics Says…
“Turkish central bank rates may have peaked, but its tightening cycle is not over. The central bank will further tighten financial conditions through its alternative instruments – a position we expect it to maintain until the third quarter of this year.”
— Selva Bahar Baziki, economist. Click here to read more.
Borrowing costs are unlikely to fall in the coming months, and officials have even warned they could tighten policy if the outlook for rising prices worsens. The central bank’s favorite gauge is monthly inflation, which has been well above its long-term average, staying above 3% throughout this year.
Domestic demand is still too strong for the central bank’s liking, preventing the economy from cooling at a faster pace. The head of a major Turkish lender has also called for rules that could curb credit card spending.
“The latest indicators confirm that domestic demand, although still at inflationary levels, continues to slow down,” the central bank said on Thursday.
Global banks such as Deutsche Bank AG and Bank of America Corp. predicted the first cut closer to the end of this year, while Morgan Stanley pushed back its expectations for easing to the first quarter of 2025.
“Inflation stickiness has remained strong,” Deutsche Bank analysts Yigit Onay and Christian Wietoska said in a report. “This, in turn, requires the resumption of a tight stance on monetary policy, essential for anchoring residents’ inflationary expectations.”
–With help from Joel Rinneby, Tugce Ozsoy and Kerim Karakaya.
(Updates with analyst comments starting in paragraph nine.)
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