(Bloomberg) — Turkey’s central bank indicated it’s in no hurry to start cutting interest rates after leaving borrowing costs on hold for a sixth straight month, though suggested such a move is getting closer after dropping a reference to potential tightening.
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The Monetary Policy Committee, led by Governor Fatih Karahan, kept the one-week repo rate at 50% on Thursday, a decision that was in line with the forecasts of all economists surveyed by Bloomberg.
“Monetary policy tools will be used effectively in case a significant and persistent deterioration in inflation is foreseen,” the MPC said in a statement accompanying the decision. The previous guidance had explicitly pledged further rises if needed.
Central bank officials said domestic demand, the key contributor of soaring prices in the past, is cooling, causing a “diminishing inflationary impact” based on third-quarter indicators. They cited expectations of an improvement in services inflation, which has been sticky, to occur in the last quarter.
The emphasis on the final three months of the year likely shifts interest-rate cut expectations closer to the end of 2024.
“We believe today’s statement supports our view of rate cuts starting in November,” said Okan Ertem, senior economist at Turk Ekonomi Bankasi AS. Economists from Goldman Sachs Group Inc and Barclays Plc have been forecasting the first cut in the same month.
Maya Senussi of Oxford Economics said “the softened rhetoric implies the bank is now less concerned the inflation outlook deteriorates to the point where further tightening might be required.” She maintained her expectation that the central bank would keep rates steady until early 2025.
The Turkish lira traded 0.1% higher at 34.0161 per US dollar as of 2:50 p.m. in Istanbul. Turkish stocks extended gains, with benchmark Borsa Istanbul 100 Index rising as much as 2% to session high.
Pressure has been growing on the central bank from exporters and industrialists to start lowering its rates to reverse a marked slowdown in the economy. Seasonally-adjusted real sector confidence was below 100 — the benchmark that separates optimism from pessimism — in August for a second consecutive month.
Annual industrial production has been negative for two straight months. Garanti BBVA economists changed their 2025 growth forecast to 2.7% from 3.5% this week, citing “lagged impact of restrictive monetary stance and fiscal consolidation.”
Annual inflation fell by almost 10 percentage points in August, but remains some way above the central bank’s year-end projection of 38%. September inflation data will be published on Oct. 3, while the MPC is next scheduled to meet on Oct. 17.
While major global central banks like the US Federal Reserve have started lowering their borrowing costs as they approach their inflation targets, Turkey is on a different cycle. It started hiking rates much later than many other monetary authorities after a transformation of economic management following President Recep Tayyip Erdogan’s reelection last year. Annual inflation remains more than 10 times the central bank’s ultimate target of 5%.
What Bloomberg Economics Says…
“We expect the central bank’s two criteria for beginning rate cuts — an easing of the underlying inflation trend and expectations moving toward its own inflation projections — to materialize in time for a first reduction of the policy rate to take place in November. The press release’s optimism on the services inflation outlook supports this view. We see the central bank taking the policy rate to 45% by year-end.”
— Selva Bahar Baziki, economist. Click here to read more.
“The central bank maintains its cautious and hawkish stance,” said Onur Ilgen, head of treasury at MUFG Bank Turkey. “The removal of explicit reference to further tightening shouldn’t be negatively interpreted given the recovery in inflation had practically removed the probability of an additional rate hike.”
–With assistance from Tugce Ozsoy, Joel Rinneby and Patrick Sykes.
(Updates with economist comment in seventh paragraph.)
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