Turkey’s central bank left its benchmark interest rate unchanged on Wednesday as accelerating inflation and the pound’s weakening leave little room for the lower borrowing costs sought by President Recep Tayyip Erdogan.
Turkey’s central bank kept its benchmark interest rate unchanged for a fourth month on Wednesday as rising prices and weakening the pound tarnish the economy’s recovery after pandemic lockdowns.
The Monetary Policy Committee kept its one-week reverse repo rate at 19%, as expected by the 21 analysts polled by Bloomberg. Turkish inflation accelerated faster than all estimates in June due to rising global commodity prices and the easing of restrictions on coronaviruses, leaving little room for lower borrowing costs that President Recep Tayyip Erdogan requested for July or August.
The central bank said it would maintain its current monetary position until a significant drop in price growth, and warned of “possible volatility” in inflation over the summer when the reopening economy.
“The current account should post a surplus over the rest of the year due to the strong upward trend in exports and the strong progress of the vaccination program stimulating tourism activities,” said the bank in a statement accompanying its rate decision.
With inflationary risks extending into July, a separate survey of 14 analysts showed most expected a rate cut only in the last three months of 2021. Four said the central bank would begin monetary easing in the third quarter.
Morgan Stanley analysts, including Alina Slyusarchuk, forecast a drop of 100 basis points in September, “when tourism-related inflows provide some support to the foreign exchange market.” But if inflationary pressures remain high, there could be a smaller reduction of 50 basis points, or a cut could be postponed to the fourth quarter, she said in an emailed note ahead of the decision. bank.
The pound has weakened by more than 15% against the dollar since Bank governor Sahap Kavcioglu took office in March, even though he has pledged to maintain a positive rate after adjusting for inflation achieved and expected and to maintain a strict policy until the bank’s 5% inflation target is reached. achieved. The currency changed little after the decision. It was trading 0.3% stronger at 8.5993 per dollar at 3:07 p.m. local time.
Istanbul-based economist Haluk Burumcekci expects the monetary authority to increase its year-end price growth forecast by 2 percentage points at its next meeting on the inflation report. “The central bank has no room for maneuver and the only weapon it has left is to postpone expectations of lower rates,” he said.
A central bank survey in July showed market participants expect headline inflation to end the year at 15.6%, above its own forecast of 12.2%. The monetary authority will update its own baseline scenario for prices through 2021 and the following two years on July 29. Inflation data for July will be released on August 3.
(Updates with read reaction in seventh paragraph, analyst quote in eighth.)