Turkey’s central bank has begun setting the stage for an interest rate cut long sought by President Tayyip Erdogan, although most analysts don’t think it will pull the trigger this week after inflation jumped and the lira took a slide.
The bank has kept its benchmark rate at 19% since March, when Erdogan installed Sahap Kavcioglu as its latest governor. That makes it one of the highest policy rates in the world – although so too is Turkey’s inflation rate https://refini.tv/3laX5UN, which touched 19.25% last month.
Ahead of a monetary policy meeting set for 2 p.m. (1100 GMT) on Thursday in Ankara, here are four key questions:
IS A RATE CUT COMING?
After months of hawkish talk that allowed the lira to recover from an all-time low in June, the central bank has changed its tune in the last few weeks.
On Sept. 1 conference calls with investors, Kavcioglu did not repeat a longstanding pledge to keep the policy rate above inflation. Two days later, data showed inflation did indeed surpass 19% https://tmsnrt.rs/3yTLHBq, leaving real rates negative.
Kavcioglu also began downplaying this “headline” inflation figure and instead stressed that a “core” measure – which is lower – is more appropriate given the fallout from the pandemic.
In a speech on Sept. 8, he said a near 30% spike in food inflation represents “short-term volatilities”, so the bank will focus more on the core measure that dipped to 16.76%. He added that policy was tight enough and predicted a falling price trend in the fourth quarter.
Investors have taken all this as a dovish turn that suggests that rate cuts are on the way. Some have warned of a “policy mistake” if they come too soon.
Fourteen of 17 economists polled by Reuters expect easing to begin in the fourth quarter, with two, including the Institute of International Finance, predicting it will start this week.
WHEN WILL INFLATION COOL DOWN?
Annual headline inflation should remain high through October and begin to dip in November due to the base effect of a jump late last year, since which it has continued to rise.
The government forecasts inflation will drop to 16.2% by the end of the year, while Goldman Sachs and Deutsche Bank see 16.7%. That should provide a window for at least one rate cut in the fourth quarter, most analysts say.
Yet because Turkey imports heavily, further lira weakness could push inflation higher and complicate or even thwart any easing. High import costs were reflected in the 45.5% annual jump in the producer price index last month.
Another risk is that the U.S. Federal Reserve removes its pandemic-era stimulus sooner than expected, which would raise U.S. yields and hurt currencies of emerging markets with high foreign debt, like Turkey.
Analysts say the biggest problem is the central bank’s diminished credibility in the face of political interference, leading to years of double-digit price rises and little confidence that inflation will soon return to a 5% target.
To read the full article: https://finance.yahoo.com/news/erdogans-waning-patience-four-questions-052105085.html