The Central Bank of Turkey kept its benchmark interest rate unchanged on Wednesday, as accelerated inflation and weak lira have left little room for the lower borrowing costs that President Recep Tayyip Erdogan has been seeking.
The central bank of Turkey kept its benchmark interest rate unchanged for the fourth consecutive month on Wednesday, as rising prices and weak lira hindered the economic recovery from the pandemic blockade.
As predicted by all 21 analysts surveyed by Bloomberg, the Monetary Policy Committee maintained its weekly repurchase rate at 19%. Due to rising global commodity prices and the relaxation of coronavirus restrictions, Turkey’s inflation rate in June was higher than all estimates, so President Recep Tayyip Erdogan (Recep Tayyip Erdogan) in July or August There is little room for monthly reductions in borrowing costs.
The central bank said it would maintain its current monetary stance until price growth fell sharply, and warned that summer inflation “may fluctuate” as the economy reopens.
“Due to the strong upward trend in exports and the strong progress made in the vaccination program to stimulate tourism activities, it is expected that the current account will be in surplus for the rest of the year,” the bank said in its interest rate decision statement.
As inflation risks are expected to continue into July, another survey of 14 analysts showed that most analysts expect interest rate cuts only in the last three months of 2021. Four analysts said that the central bank will begin monetary easing in the third quarter.
Morgan Stanley analysts including Alina Slyusarchuk predict that interest rates will be cut by 100 basis points in September. “At that time, the inflow of funds related to the tourism industry will provide some support for the foreign exchange market.” But she was one of the first steps before the bank made a decision. The email stated that if inflationary pressures still rise, the rate cut may be small, with a 50 basis point reduction, or the rate cut may be postponed to the fourth quarter.
Since the bank’s governor Sahap Kavcioglu took over in March, the lira has fallen by more than 15% against the U.S. dollar, despite his pledge to maintain positive interest rates after adjusting for realized and expected inflation and maintain tightening policies until the bank’s 5% The inflation target has been reached. After the decision was made, the currency hardly changed. At 3:07 pm local time, its trading price was 8.5993 per dollar, an increase of 0.3%.
Istanbul economist Haluk Burumcekci predicts that the monetary authority will raise its current year-end price growth forecast by 2 percentage points at the upcoming inflation report meeting. “The central bank has no room for maneuver, and its only weapon left is to postpone its interest rate cut expectations,” he said.
A survey conducted by the central bank in July showed that market participants expected the headline inflation rate to reach 15.6% by the end of this year, higher than their own forecast of 12.2%. The monetary authority will update the price benchmark scenario for the remainder of 2021 and the next two years on July 29. July inflation data will be released on August 3.
(Updated the Lira response in the seventh paragraph, quoted by the analyst in the eighth paragraph.)