Turkey Pauses Interest Rate Cuts After Surge in Inflation

  • In Business
  • 2022-01-20 12:42:30Z
  • By Bloomberg

(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Most Read from Bloomberg

  • Early Omicron Breakthroughs Show MRNA Vaccines' Weakness

  • Why Some Vaccinated People Resist Omicron and Others Don't

  • Biden Expects Russia to 'Move In' on Ukraine; Warns of Sanctions

  • Stocks Drop as Selloff Puts Nasdaq Into Correction: Markets Wrap

  • Is Covid Becoming Endemic? What Would That Mean?

Turkey's central bank kept its benchmark interest rate unchanged 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 reorient the economy toward 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 prioritize 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 Ltd. "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 as of 2:54 p.m. local time 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 last round of easing. The central bank had signaled last year that December's rate cut would likely 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 last year unleashed an unprecedented rout in the lira.

The Turkish currency lost as much as half its value in three months before stabilizing after the government introduced emergency measures in December, including a program 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% although 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 Jan. 27. The central bank currently 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 Feb. 3.

(Recasts with analyst quotes in the fifth and seventh paraghraphs)

Most Read from Bloomberg Businessweek

  • Wall Street Traders Muscle Into the Middle of Crypto

  • One Year Into His Term, Biden Finds Himself Boxed In on China

  • Microsoft Makes a $69 Billion Down Payment on the Metaverse

  • Work From Home Is Becoming a Permanent Part of How Jobs Are Done

  • Airlines Step Up Hygiene to Keep Covid Out of the Air

©2022 Bloomberg L.P.


More Related News

Russia Default Risk Surges as US Set to End Key Bond Waiver
Russia Default Risk Surges as US Set to End Key Bond Waiver

(Bloomberg) -- Russian default risk surged as investors reacted to the possibility that the Biden administration will fully block bond payments from the...

Pennsylvania GOP Senate race, Finland and Sweden bid to join NATO, formula shortage: 5 things to know Wednesday
Pennsylvania GOP Senate race, Finland and Sweden bid to join NATO, formula shortage: 5 things to know Wednesday

The Pennsylvania GOP Senate race remains uncalled, Finland and Sweden apply to join NATO and more news to start your Wednesday.

US Set to Block Russian Debt Payments, Raising Default Odds
US Set to Block Russian Debt Payments, Raising Default Odds

(Bloomberg) -- The Biden administration is poised to fully block Russian bond payments to US investors after a deadline expires next week, a move that could ...

Walmart-Backed PhonePe Buys Indian Wealth Management Firms
Walmart-Backed PhonePe Buys Indian Wealth Management Firms

(Bloomberg) -- PhonePe, an Indian payments company backed by Walmart Inc., will acquire two wealth management firms for a total enterprise value of $75...

Baidu's Chip Affiliate Eyes Fundraise at $2.5 Billion Valuation

(Bloomberg) -- Baidu Inc.'s chip affiliate is looking to raise 2 billion yuan ($317 million) in a new funding round, people familiar with the matter said, as...

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply


Top News: Business