Turkish Rate Cuts Are Back on Agenda as Policy Bias Shift Again

Turkey’s central bank added ambiguity to the direction of its policy as it left interest rates unchanged on Thursday.

(Bloomberg) —

Turkey’s central bank added ambiguity to the direction of its policy as it left interest rates unchanged on Thursday.

The Monetary Policy Committee, led by Governor Sahap Kavcioglu, kept the benchmark at 9% for a second straight month, matching the forecasts of all but one economist in a Bloomberg survey. 

But unlike last month, the MPC’s latest guidance didn’t describe the current level of rates as “adequate,” a change that could be setting the stage for more monetary easing, according to Bloomberg Economics. 

To achieve price stability, policymakers vowed to carry out their “liraization strategy,” a set of measures that promote the wider use of the Turkish currency.

It’s the latest twist in a monetary policy that’s defied convention with abrupt easing cycles in 2021 and 2022.

Rate cuts between August and November last year brought the official cost of borrowing down by 500 basis points and into single digits. The steps followed explicit calls by President Recep Tayyip Erdogan to ensure money is cheap, which he argues — contrary to mainstream economic theory — will stabilize consumer prices.

Conditions may already be ripe to resume monetary easing, according to Tugberk Citilci, head of research at Istanbul-based Invest AZ Menkul Degerler A.S.

Industry, Investments

Citilci, the lone economist in the Bloomberg poll who expected a reduction this week, said before the decision on Thursday that he expected “support for exporters and businesspeople as industrial production is low and investments have stopped.” 

The central bank has been resorting to instruments other than interest rates to get a grip on inflation that reached nearly a quarter-century high last year. It’s been micro-managing the economy by using regulations to shore up the local currency and intervene in the way commercial lenders extend credit.

In its statement, the MPC said that “the integrated policy approach” that’s been implemented is helping keep inflation in check.

What Bloomberg Economics Says… 

“The central bank no longer views its policy rate of 9% as “adequate,” which puts the possibility of rate cuts back on the table. Since its previous policy meeting in December, the bank has reshaped its security maintenance and reserve requirements mainly to support the currency. We see changes in these two tools, as well as directed credit schemes and banking regulation dominating the policy sphere for the central bank.”

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

With presidential and parliamentary elections slated for May, Erdogan is pushing for looser monetary and fiscal policies to fuel demand. The Turkish leader has described rates at their current level as optimal for investment and supporting economic growth.

“Although recently released data point to a stronger economic activity than anticipated, recession concerns in developed economies as a result of ongoing geopolitical risks and interest-rate hikes continue,” the MPC said in its statement.

The challenge for the central bank now is how to ensure that loan rates keep falling while simultaneously driving up demand for liras among Turks. The latest rules introduced at the start of this year look to encourage longer-term deposits and increase the share of local-currency savings.

Turkey Tells Banks to Counter Dwindling Appeal of Lira Deposits

For now, easy credit hasn’t translated into a lending boom. Private banks are hesitant to provide cheap corporate financing ahead of elections, prompting warnings from policymakers.

Risks still abound for inflation. 

With interest rates likely to stay low for longer, fiscal stimulus is emerging as another source of pressure on consumer prices. The government has been increasing public spending through significant hikes to minimum and civil servant wages, pensions and cheap loans packages. 

Kavcioglu will present this year’s first quarterly inflation report next Thursday in Ankara. The central bank governor’s most recent projections showed inflation will end the year at 22.3%.

The inflation outlook has grown less dire recently, thanks in large part to the statistical effect of a high base in 2021. Price growth still remains about 13 times higher than the central bank’s official target.

Turkish Finance Czar Rules Out Policy U-Turn After Elections

Treasury and Finance Minister Nureddin Nebati said this month that the issue of inflation had been “resolved.” Price increases in December decelerated at the steepest pace in more than a quarter century, bringing the annual rate to 64% from above 80% in the previous months. 

–With assistance from Joel Rinneby and Zoe Schneeweiss.

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