Turkey’s central bank is poised to extend its interest-rate pause as it tries to keep the lira stable just days before a presidential runoff in which incumbent Recep Tayyip Erdogan is seeking reelection.
(Bloomberg) — Turkey’s central bank is poised to extend its interest-rate pause as it tries to keep the lira stable just days before a presidential runoff in which incumbent Recep Tayyip Erdogan is seeking reelection.
Economists surveyed by Bloomberg are unanimous in predicting the Monetary Policy Committee will leave its one-week repo rate at 8.5% on Thursday. The MPC has previously described its stance as being “adequate,” a signal that no change is likely.
A decision to hold rates for a third consecutive month may buy the central bank more time as it faces down pressure on the Turkish currency ahead of the ballot on Sunday. Erdogan won 49.5% of the votes of the first round, more than polls had predicted and leaving him just shy of the 50% threshold needed to avoid a runoff.
With the lira already trading around a record low, a longer pause is among the few policy choices left as market expectations mount for a steeper decline regardless of who wins the second-round vote. Top officials including Finance Minister Nureddin Nebati have made clear that rate hikes aren’t on the agenda.
Turkey has been a global outlier as policymakers around the world unleashed the most aggressive monetary tightening in 40 years in response to price shocks. Under Governor Sahap Kavcioglu, the central bank acquiesced to Erdogan’s calls for cheap money to boost economic growth by cutting rates even as inflation soared.
What Bloomberg Economics Says…
“We expect Turkey’s central bank to keep its policy rate on hold at its May meeting — even with inflation running above 40%. It is likely to continue using banking regulation and alternative practices to curb the negative feedback on the lira from its loose policy stance.”
— Selva Bahar Baziki, economist. Click here to read more.
The president last week reiterated his view that Turkey’s low-rates policy would continue after elections, and inflation — currently at an annual 44% — would slow as a result. For most mainstream economists, the approach is unsustainable and increasingly puts Turkish assets at risk of a selloff.
In case of a victory by Erdogan, the outcome “spells an extremely adverse inflation outlook going forward,” said Erik Meyersson, chief emerging-markets strategist at SEB AB in Stockholm. “Financial instability concerns will remain at the forefront.”
Unease over the steps taken by officials is playing out in the market.
The lira has lost nearly 6% of its value against the dollar so far this year. The cost of insuring against a sovereign default over the next five years this week has risen to its highest in over six months.
Lacking the option of raising rates, efforts to defend the lira have instead relied on a patchwork of measures such as limiting the amount of dollars lenders can purchase in the interbank market and pressuring them to increase the conversion of foreign-exchange savings into lira deposits.
Read more: Turkey’s Lira Defense Moves Into Full Swing Before Runoff
The central bank has also been ramping up interventions in the currency market, an approach so costly that economists estimate it helped push net reserves — as defined by the International Monetary Fund — slightly below zero in the week after the first round of elections on May 14.
Though slowing the lira’s depreciation, the policies have disrupted the transmission of interest rates across the economy.
Despite an easing cycle that slashed borrowing costs by a cumulative 550 basis points since last year, the average rate on lira deposits has climbed to 30.5%, the highest in 20 years. The cost of consumer loans is also above 30%, according to the latest data.
Erdogan’s edge over his key rival in the first round of voting, and his alliance retaining its majority in parliament, probably mean the president’s unconventional policies may stay for as long as Turkey can afford it. The main opposition candidate, Kemal Kilicdaroglu, has promised a return to orthodox economics if elected.
“Absent any significant adverse shock, external or domestic, we don’t expect a central bank U-turn in the short run,” Meyersson said. “Authorities’ focus will instead be continued unorthodoxy, capital controls, and on boosting incentives for domestic investors to hold lira assets.”
–With assistance from Joel Rinneby.
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