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Turkish central bank governor Sahap Kavcioglu speaks in Ankara, Turkey, October 15 2021. Picture: CAGLA GURDOGAN/REUTERS
Turkish central bank governor Sahap Kavcioglu speaks in Ankara, Turkey, October 15 2021. Picture: CAGLA GURDOGAN/REUTERS

Turkey’s central bank kept its benchmark interest rate unchanged on Thursday, pausing a cycle of rate cuts and launching an “open-ended” policy review after inflation surged to its highest level since the beginning of President Recep Tayyip Erdogan’s 19-year rule.

The monetary policy committee, led by governor Sahap Kavcioglu, held its one-week repo rate at 14% as forecast by all 20 analysts surveyed by Bloomberg, in its first meeting since inflation hit a record 36.1%. Soaring prices have caused an outcry among Turks who’ve seen the value of their earnings plummet in the space of a few months. 

While most emerging markets have begun tightening monetary policy to head off global price pressures, Turkey cut rates by 500 basis points in four consecutive meetings before Thursday’s, an aggressive easing cycle demanded by Erdogan’s high-stakes bid to boost growth and reorientate the economy towards manufacturing and exports. 

In Thursday’s statement, the central bank did not reinforce its December pledge to avoid rate cuts during the first quarter of 2022. It said, however, that it would conduct a comprehensive review of its policy framework to prioritise the Turkish lira, battered by the rate cuts that have pushed real yields deep into negative territory. 

Market reaction to Thursday’s decision was muted, however, with investors welcoming the pause but complaining that Turkish monetary policy had become more tethered to Erdogan’s political whims than the central bank’s official guidance.

After the jump in inflation and slide in the lira, “a rational decision should have been a rate hike”, said Piotr Matys, an analyst at InTouch Capital Markets. “Trying to decipher the overall message embedded in the statement seems to be a pointless exercise as the market seems to listen more to what President Erdogan has to say on monetary policy than the central bank.”

The lira was trading 0.8% higher against the dollar at 13.3194 in the afternoon after advancing as much as 1.2% on the heels of the decision. Those moves were relatively restrained in comparison to the sharp depreciation and wild swings the currency has witnessed in recent months. 

The fact that the central bank dropped its earlier pledge to maintain the hold policy for the first quarter suggests the central bank could “keep the interest rates unchanged for longer”, according to economist Haluk Burumcekci, founder of Burumcekci Research and Consulting in Istanbul. He described the new phase as an “open-ended, indefinite and mysterious review process”.

Keeping rates unchanged might have carried risks for the governor, as Erdogan has fired three governors since 2019 amid disagreements over the direction of Turkey’s monetary policy. But the president has softened his tone in recent comments, saying borrowing costs would fall gradually in 2022 and the lira would slowly strengthen. 

Erdogan’s comments echoed those of treasury and finance minister Nureddin Nebati, who told Bloomberg last week that policymakers would wait to see how the economy responds in the first quarter to the past round of easing. The central bank had signalled in 2021 that December’s rate cut would probably be the last of the current cycle. 

Rising prices

A self-described “enemy” of high interest rates, Erdogan’s intense pressure for lower borrowing costs in 2021 unleashed an unprecedented rout in the lira. 

The Turkish currency lost as much as half its value in three months before stabilising after the government introduced emergency measures in December, including a programme to compensate lira holders for major currency declines.  

But the lira depreciation, combined with surging global energy prices, has already translated into soaring prices and a worsening outlook.

The inflation rate hit 36.1% in December. Inflation expectations for the next 12 months jumped to 25.37% from 21.39%, according to the central bank’s January survey of market participants. Some Wall Street banks predict last year’s currency crisis could push inflation beyond 50% though Nebati argues that it will peak early and at a far lower rate.

Kavcioglu will update the bank’s base-case scenario for inflation through 2022 and the following two years on January 27. The central bank sees consumer price growth ending 2022 at 11.8% according to its latest inflation report published in October.

The statistics agency will publish January inflation data on February 3.

Bloomberg News. More stories like this are available on bloomberg.com

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