Turkey to Hold Interest Rates Steady to Slow Sticky Inflation

(Bloomberg) — Turkey’s central bank is expected to extend its interest-rate pause for a seventh straight month after September inflation data came in higher than expected.

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The Monetary Policy Committee led by Governor Fatih Karahan is seen holding rates at 50% on Thursday, according to almost all economists surveyed by Bloomberg. One dissenter is penciling in a 250 basis-point rate cut.

The MPC softened its tone on a potential rate reduction last month, anticipating improvement in services inflation in the final quarter. That prompted economists to suggest a cut could come in November, but worse-than-anticipated data saw those forecasts revised to January.

The central bank looks at two main criteria when considering whether Turkey is ready for rate cuts, namely a sustained decline in monthly price growth and improved inflation expectations by corporates and households. Governor Karahan said there’s “some distance to go” in both criteria.

“A too dovish-sounding message amid ongoing inflation pressures and possibly global uncertainty would be inadvisable,” said Erik Meyersson, chief emerging-markets strategist at SEB AB. Both the upcoming US elections and ongoing Middle East conflict are creating uncertainty, he said.

“It would also be useful if the Turkish central bank would spell out more in detail how they intend to pace its rate-cutting sequence,” he said.

The central bank’s favored gauge of seasonally-adjusted monthly inflation has been stuck around 3%. Deputy Governor Cevdet Akcay told the Economist last week that the bank would “stay tight until the underlying trend of monthly inflation comes down to a sustainable basis.”

What Bloomberg Economics Says…

“We expect the central bank to keep the one-week repo rate on hold at 50% – the peak for the cycle it reached in March. Additional tightening may arrive through the central bank’s alternative tools to keep credit growth in check. Liquidity steps addressing the abundance of liras in the market could also be on the agenda.”

— Selva Bahar Baziki, economist. Click here to read more.

Turkish President Recep Tayyip Erdogan approved a revamp of economic policy last year, but investors can’t shake off concerns on how long he will allow rates to stay this high given his history of favoring a growth-at-all-costs strategy.

Though underlying pressures warrant keeping rates at 50% throughout the rest of the year, Meyersson said a rate cut could come before the end of 2024 over “implicit political pressures.”