Turkey’s central bank slowed its pace of interest-rate increases on Thursday, a move that further exposes local assets to a selloff as inflation still hovers near 40%.
(Bloomberg) — Turkey’s central bank slowed its pace of interest-rate increases on Thursday, a move that further exposes local assets to a selloff as inflation still hovers near 40%.
The Monetary Policy Committee led by Governor Hafize Gaye Erkan raised the benchmark to 17.5% from 15%. Only four economists in a Bloomberg survey correctly predicted the decision, with most analysts expecting a bigger move.
The central bank also pledged quantitative and credit tightening to support the rate hikes, according to the MPC statement.
“Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved,” the committee said.
Turkish stocks extended their rally while the lira maintained losses after the announcement, trading almost 0.5% weaker against the dollar. Deutsche Bank AG had said that a hike of anything less than 500 basis points would put renewed pressure on the currency.
The decision dials back the pace of rate increases that started after Erkan’s appointment last month, as part of a tightening cycle the central bank describes as “gradual.” Economists and investors widely anticipated a more aggressive pivot from the easy-money policy favored by President Recep Tayyip Erdogan.
In unwinding years of unconventional measures, Erdogan’s new economic team is scaling back support for the lira, rebuilding foreign reserves and simplifying regulations that were used to stabilize the Turkish currency. In June, the central bank delivered its first rate hike in over two years, opting for a 650 basis-point step that underwhelmed the market.
The Turkish president has also looked for financial help abroad, visiting the Gulf Arab region this week and securing provisional deals with the United Arab Emirates that could be worth more than $50 billion.
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Foreign direct investments and higher tourism income will help Turkey narrow the deficit in its current account and rein in inflation, the central bank said in its statement.
At the same time, authorities are moving ahead with fiscal measures that Barclays Plc said are “stronger than we previously expected.” The new steps — which range from increases in several value-added tax rates to higher corporate levies for banks — became necessary in part to pay for costly promises made to voters by Erdogan before May elections.
“The authorities might be planning to compensate for less than ideal tightening on the monetary policy side by tighter fiscal policy,” Barclays economist Ercan Erguzel said in a research note before the rate announcement.
The balancing act will grow even more tricky with the approach of local elections next March. Faster economic growth could again become a priority as Erdogan focuses on trying to wrest some of the country’s biggest cities from the opposition.
In the backdrop, the lira is trading near record lows in a further threat to inflation. The Turkish currency has lost over 30% of its value this year, the biggest depreciation in emerging markets after Argentina’s peso.
Under Erkan’s predecessor, the central bank was projecting that price growth would end the year at 22.3%, an outlook likely to be revised higher next week when the central bank unveils its new quarterly inflation report.
The presentation will effectively mark Erkan’s public debut since the new governor has so far made only sparse remarks about the direction of monetary policy.
(Updates with central bank comment starting in third paragraph.)
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