(Bloomberg) — Turkey’s central bank will probably keep its main interest rate unchanged for a sixth straight month, as a lack of significant improvement in underlying inflation pushes the monetary authority to stick with a tighter bias.
All economists surveyed by Bloomberg expect the Monetary Policy Committee to hold the one-week repo rate at 50%. Annual inflation fell by almost 10 percentage points in August, but remains some way above the central bank’s year-end projection of 38%.
The conditions set by the central bank for starting an easing cycle have yet to materialize. Monthly price increases have recently been strong due to persistent pressure in services inflation.
Another key prerequisite — households’ and businesses’ inflation expectations — remains well above projections by policymakers for the coming year.
Central bank Governor Fatih Karahan will want to see monthly inflation below 2% before it starts cutting, Goldman Sachs Group Inc. economists Clemens Grafe and Basak Edizgil said in a report after their trip to Turkey during Sept. 10-12.
“From the bank’s perspective, easing monetary policy prematurely is more costly in Turkey than falling behind the curve, especially in the current environment,” they said, while forecasting a 100 basis-point reduction in November.
What Bloomberg Economics Says…
“That slowdown in monthly gains, and a likely dip in the September annual inflation rate below the policy rate, will probably result in year-ahead inflation expectations for households and firms to start moving lower in October. That would mean progress on the central bank’s second condition for starting rate cuts.”
— Selva Bahar Baziki, economist. Click here to read more.
The US Federal Reserve lowered its benchmark rate by a half percentage point Wednesday, while central banks in dollar-pegging Saudi Arabia, the United Arab Emirates and Bahrain followed suit.
Morgan Stanley economist Hande Kucuk doesn’t expect a Turkish rate cut until underlying inflation pulls back to 1.5%-1.8% on a seasonally adjusted monthly basis for at least two consecutive months. The country is on a different cycle to the US and others, due to a transformation of economic management since President Recep Tayyip Erdogan was reelected last year.
“We expect this to materialize in October and November,” Kucuk said in a note. “We still expect rate cuts to start in 2025 after resolution of uncertainty around new year wage and price hikes.”
Selva Demiralp, a professor of economics at Istanbul-based Koc University, said the first quarter of 2025 would be a better time to cut rates since there would be clearer evidence of a sustained decline in inflation.
“Although the central bank might argue that a rate cut in the last quarter would be a ‘hawkish cut’ due to a decline in the inflation rate, I’m skeptical that households and firms would interpret it that way,” she said.
–With assistance from Joel Rinneby.
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