Turkey Unexpectedly Holds Rates as Post-Coup Growth Falters

Updated on
  • Economists had forecast increase to overnight lending rate
  • Central bank decision comes after data shows 3Q contraction

Turkey Unexpectedly Keeps Rates Unchanged

Turkey’s central bank unexpectedly kept all of its three main interest rates unchanged, a decision viewed by analysts as an attempt to support an economy that has slowed sharply since July’s failed military coup.

The bank kept its one-week repurchase, overnight lending and borrowing rates unchanged at 8 percent, 8.5 percent and 7.25 percent respectively, it said in a statement on Tuesday. Economists surveyed by Bloomberg forecast a 25-basis point increase to the overnight lending rate and no change to the other two.

Turkey’s gross domestic product contracted in the third quarter for the first time in seven years, as July’s failed coup weighed on consumption and investments. The decision to hold rates suggests that the bank’s desire to tackle faltering growth superseded concerns about the weaker lira and its impact on inflation, according to Credit Agricole strategist Guillaume Tresca.

“It is not a big surprise given the economic slowdown,” said Tresca, one of only five economists in a Bloomberg survey of 16 who predicted that the bank would hold the overnight lending rate. “The central bank doesn’t have room to maneuver.”

The lira briefly weakened after the decision before returning to gains, trading 0.5 percent stronger at 3.5156 per dollar at 3:19 p.m. in Istanbul. The currency has depreciated by about 10 percent since Donald Trump’s U.S. election victory triggered a broader emerging market sell-off, while the U.S. Federal Reserve’s decision to raise lending costs has also dimmed the outlook for riskier assets.

As the currency tumbled, the bank raised interest rates last month for the first time in nearly three years. Central bank Governor Murat Cetinkaya later said he would likely wait to determine whether lira weakness would have a temporary or long-term impact on inflation before rushing into policy action, a stance reiterated by the Monetary Policy Committee in Tuesday’s statement.

Inflation Risk

Consumer prices have risen an annual 7 percent through November, compared with the central bank’s target of 5 percent.

“Exchange-rate movements due to recently heightened global uncertainty” pose inflationary risks, the bank said. “Yet the aggregate demand developments restrain these effects. Developments will be closely monitored in order to make a sound assessment regarding the net impact of these factors.”

Meanwhile, investors are positioned to gain from a further slide in the lira, which explains the market reaction following the bank’s decision, Tresca said.

The lira will weaken to 3.65 per dollar in the next three months, “sooner than our original forecast of 12 months,” Nomura International economist Inan Demir said in an e-mailed note following the central bank’s decision. “A hike today would have been an opportunity to acknowledge the deterioration in the inflation outlook and global backdrop.”

Turkey’s currency is likely to come under renewed pressure next year as the U.S. raises borrowing costs, forcing Turkey to follow suit, William Jackson, emerging markets economist at Capital Economics in London, said by e-mail.

“For one thing, the economy should return to positive growth as the impact from July’s coup attempt fades,” Jackson said, adding that he expects Turkey’s overnight lending rate to rise to 10 percent by the end of 2017.