Turkey Holds Rates, Vows ‘Decisively’ Tight Policy on Inflation

Updated on
  • Thursday decision in line with Bloomberg surveys of economists
  • Consumer inflation rate more than double central bank’s target

Turkey’s central bank kept its main interest rates unchanged as expected on Thursday, and said it will maintain a tight monetary policy “decisively” until the outlook for consumer inflation improves.

The late liquidity window and overnight lending rates remained at 12.25 percent and 9.25 percent respectively, matching the median estimate in Bloomberg surveys. The one-week repo and overnight borrowing rates were held at 8 percent and 7.25 percent, also in line with expectations.

Though Governor Murat Cetinkaya has made it clear that liquidity must remain tight until there’s a slowdown in price gains, it was the first time that his monetary policy committee’s statement included the word “decisively.” The regulator also modified what it is looking for in the inflation outlook, adding the need to meet the bank’s expectations to its earlier requirement merely for an improvement. Taken together, the changes make the statement “relatively” hawkish, according to Piotr Matys, a strategist at Rabobank in London.

“It is a warning signal that the central bank can tighten policy,” Matys said by email after the decision. “The bank knows how to deal with speculators who are betting against the lira. The question is at what stage Governor Cetinkaya may opt to raise rates further.”

The central bank began tightening monetary policy late last year as the lira depreciated, eventually reaching a record low in January. Though the currency stabilized, the regulator has found it difficult to bring down the consumer inflation rate. It was 11.2 percent in September, compared with the long-term target of 5 percent. The bank has also raised the cost of cash it provides to commercial lenders to the highest level since at least 2011.

Key Risks

“The tight stance in monetary policy will be maintained decisively until the inflation outlook displays a significant improvement and becomes consistent with the targets,” the central bank said. “Elevated” levels of consumer inflation and the pace of gains in core prices -- which exclude volatile items such as food and gold -- are key risks to pricing behavior, it said.

Even so, the lira’s reaction reflected divisions in the market on how the bank’s statement should be taken. The currency initially extended losses to as much as 0.5 percent against the dollar, before switching between gains and losses. It was trading 0.2 percent weaker at 3.7732 per dollar at 3:44 p.m. in Istanbul.

The bank is trying to prepare investors for an extended period of tight conditions, said Ziraat Bank economist Bora Tamer Yilmaz, with any potential easing likely delayed until the second half of 2018.

Others said the bank had not been sufficiently hawkish. The statement implies a commitment to hold rates, making it less likely that liquidity will be tightened, said Turk Ekonomi Bankasi AS strategist Erkin Isik, adding that the lira may now come under pressure.

Investors may try to test the bank’s determination to maintain rates given the recent acceleration in core inflation, according to NatWest Markets strategist Gabor Ambrus, the only analyst in the Bloomberg survey who predicted that the bank would increase the late liquidity rate on Thursday.

“Although they did not hike rates today, I think the probability of tightening remains elevated in the near future,” Ambrus said after the decision.

— With assistance by Constantine Courcoulas

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