Turkey Holds Off From Rate Cut to Spare Lira Before Election

Turkey’s central bank kept interest rates unchanged on Thursday, heeding the market at its last policy-setting meeting before pivotal elections next month.

(Bloomberg) — Turkey’s central bank kept interest rates unchanged on Thursday, heeding the market at its last policy-setting meeting before pivotal elections next month. 

A surge in the Turkish lira’s volatility and expectations for steeper depreciation ahead, regardless of the outcome at the ballot box, likely proved decisive for a central bank that’s been under pressure from President Recep Tayyip Erdogan to ensure ever-lower rates.

The Monetary Policy Committee led by Governor Sahap Kavcioglu left the one-week repo rate at 8.5% for a second month in a row, in line with the forecasts of most economists surveyed by Bloomberg.

In a statement accompanying the rate announcement, policymakers said the region affected by February’s earthquakes “has been recovering faster than expected.” The government had said the disaster that killed over 50,000 people in the country’s southeast will exact an economic toll estimated at about $104 billion.

The central bank also repeated its assessment that “the current monetary policy stance is adequate to support the necessary recovery in the aftermath of the earthquake by maintaining price stability and financial stability.”

The pause follows an intensifying effort by the central bank to stiffen financial regulations in defense of the currency, even asking lenders to limit their dollar purchases as part of a meddling approach that’s been a hallmark under Kavcioglu.

The Turkish currency has meanwhile been plumbing record lows, down by nearly 4% against the dollar since the start of this year. Even assuming a policy normalization after the elections, the Turkish currency may decline 30% against the dollar from its current levels, according to JPMorgan Chase & Co.

What Bloomberg Economics Says… 

“The motivation to not add to the pressure on the lira likely trumped the impetus to ease on President Erdogan’s preference for lower rates. Against a backdrop of still rising rates in major economies, and the central bank’s loose stance, the pressure on the currency is likely to persist. In our view, that will see the central bank press on with securities maintenance and reserve requirements tools, banking regulation and stealth interventions in order to prop up the currency.”

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

Pressure on the lira has only built with demand for dollars rising as the elections approach and the central bank’s gross foreign-exchange reserves now at the lowest since last July.

The Turkish currency has seen little relief even as the government’s FX-protected lira deposit accounts have received record inflows in recent weeks after interest rate caps on them were removed last month. 

Through April 20, the savings program — which previously helped stabilize the lira — absorbed about 89 billion liras ($4.6 billion) in fresh money, the latest data showed. 

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Long fixated on pushing rates lower, Erdogan has taken a heavier hand in dictating monetary policy since expanding his powers five years ago. 

In just over two years at the helm, Kavcioglu has delivered nine rate cuts and not a single hike, despite having to navigate Turkey’s worst cost-of-living crisis in decades. It was also a period that saw the world’s most aggressive and synchronized monetary policy tightening in 40 years, leaving Turkey an outlier with borrowing costs among the world’s lowest when adjusted for inflation.

At most recent meetings, the central bank was receptive to the president’s calls in reducing its benchmark by 5.5% percentage points since August. 

Though inflation is cooling off in Turkey, it’s been above 50% for over a year. The central bank will issue its second quarterly inflation report of the year on May 4. 

The alarm among investors hasn’t resonated with Erdogan, who said last week that rates would fall as long as he is in power and bring inflation down with them. 

“We will be an example to the world with the Turkey model,” he said.

–With assistance from Joel Rinneby.

(Updates with economist comment, deposit inflows.)

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