Turkey: Central Bank holds fire as expected
The Central Bank of the Republic of Turkey (TCMB) stood pat at its 23 June meeting, leaving the one-week repo rate unchanged at 14.00%, as had been expected by market analysts. With inflation rising to 73.5% in May, the real interest rate dropped to minus 59.5%. Meanwhile, the Bank reiterated its commitment to foster greater “liraization” of the economy and to strengthen the currency—goals that it has been struggling to achieve.
TCMB stated that the rise in inflation was outside its scope of influence, as it was due to factors that “are not supported by economic fundamentals” and the fallout from the war in Ukraine. Moreover, the Bank continues to expect disinflation to kick in on the back of previous policy action, a base effect, and a “resolution [to] the ongoing regional conflict.” Regarding the economy, the Bank stated that high-frequency indicators suggest that the strong growth momentum of the first quarter carried over into the second, aided by robust external demand. That said, “risks to the current account balance due to energy prices continue. Sustainable current account balance is important for price stability.”
In the press release, the Bank’s tone was largely unchanged from the prior meeting. It doubled-down on liraization, “until strong indicators point to a permanent fall in inflation and the medium-term 5% target is achieved in pursuit of the primary objective of price stability.” While this would suggest that the Bank will continue to stand pat in the months ahead until inflation comes down, a rate cut cannot be ruled out given recent remarks by President Erdogan about bring interest rates down.
The next meeting is scheduled for 21 July.
Muhammet Mercan, chief Turkey economist at ING, commented:
“Given no change in policy direction to prioritize inflation and allow a normalization in real rates, the risks to the macro outlook will likely remain a key concern, depending on exchange rate developments and higher price pressures.”
Clemens Grafe, analyst at Goldman Sachs, said:
“Looking ahead, we expect policy rates to remain unchanged at 14.00% until 2023 and thus see real rates moving deeper into negative territory during Q4 2022—fueling headline inflation further and substantially derailing year-end inflation expectations. We forecast inflation to rise to close to 80.0% and only fall to 65.0% at end-2022 with the help of base effects.”