Turkey to Pivot Toward Interest-Rate Cut After One More Hold

(Bloomberg) — Turkey’s central bank will probably hold its main interest rate for an eighth straight month this week, though policymakers could indicate the start of an easing cycle as soon as December.

The Monetary Policy Committee will leave the one-week repo rate unchanged at 50% on Thursday, according to all economists surveyed by Bloomberg. Yet policymakers are expected to soften their language in the statement accompanying the decision, signaling a downward move could be imminent.

The policy outlook has been blurred in recent months due to higher-than-forecast inflation prints in September and October. Many analysts pushed predictions for a rate cut into next year after the release of that data, having previously penciled in November.

But despite appearing to commit to high rates at the last policy meeting, Central Bank Governor Fatih Karahan adopted a different tone earlier this month, while revising up inflation projections for this year and beyond. 

The changes suggested a “slightly less hawkish monetary policy stance,” according to Deutsche Bank analysts including Ankit Jain. The lender, which had predicted a rate cut in January, subsequently changed its call to next month.

The last MPC meeting of the year is scheduled for Dec. 26.

Goldman Sachs Group Inc. and Morgan Stanley economists, meanwhile, continue to think the first rate decrease will only be delivered in January. 

Annual inflation decelerated to 48.6% in October, with the central bank estimating the year-end level will fall to 44%. Policymakers prefer to look at seasonally-adjusted monthly prices, however, and Bloomberg Economics sees a “significant drop” for that measure in November. That could pave the way for cuts to start in December, said Bloomberg’s Turkey economist Selva Bahar Baziki.

With interest rates at 50%, businesses are growing more impatient. Influential lobby group Musiad joined in calls for a cut earlier this week, saying there should be a “symbolic” one next month, complaining the cost of doing business is too expensive.

Turkish President Recep Tayyip Erdogan, known for his aversion to high borrowing costs, also spoke about monetary policy after months of silence, giving a somewhat cryptic message that “both inflation and borrowing costs will fall.”

Erdogan has pushed central bankers to lower rates in the past — regardless of inflation — to spur economic growth and has removed those who didn’t toe the line.

With a debate on next year’s minimum-wage raise looming, more attention is being paid to complementary fiscal steps to help bring inflation down. Karahan said price rises in certain sectors stem from factors that monetary policy has little control over.

Treasury and Finance Minister Mehmet Simsek has conceded that additional fiscal steps have to be taken.

The minimum-wage increase for next year, likely announced in December, will be key. Deutsche Bank’s economists say investors would see a raise of about 25% as appropriate and would be alarmed at anything above 30%.

On Wednesday, Erdogan pledged that wage increases will continue to outpace inflation next year and that workers’ purchasing power will be safeguarded.

–With assistance from Joel Rinneby.

(Updates with President Erdogan’s comments on minimum-wage increase.)

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