Turkish Rates Likely Already at Peak Even If Inflation Isn’t Yet

Beril Akman
·3 min read

(Bloomberg) -- Turkey’s central bank is set to look past a final spurt in inflation to around 75% this month, likely extending an interest-rate pause it justifies by focusing on more optimistic projections.

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The highest nominal rates among the Group of 20 nations are finally feeding through to an economy that’s having to contend with one of the fastest levels of inflation in the world. And in a rarity for Turkey, inflation expectations have been declining despite a long unbroken stretch of price acceleration.

With inflation now on track to start slowing next month, economists are unanimous for the first time since February that policymakers will keep their benchmark at 50% on Thursday. Global banks from UBS Group AG to Citigroup Inc. predict rates will fall before the end of this year.

A second straight hold is unlikely to mean policymakers are anywhere near turning less hawkish, just a month after Governor Fatih Karahan promised to do “whatever it takes” to get a grip on prices and then upwardly revised the central bank’s year-end goal for inflation to 38%.

Rate hikes aren’t off the agenda quite yet, according to lenders including Morgan Stanley and HSBC Holdings Plc. Should there be a lack of improvement in inflation momentum by June, “some discussion of further tightening may be warranted,” HSBC economist Melis Metiner said in a report.

“The upcoming CPI releases are likely to be critical,” she said. “If the improving trend seen in April continues, the policymakers can feel more comfortable about keeping interest rates on hold, which we believe is their preference.”

What Bloomberg Economics Says...

“With the policy rate remaining on hold, we expect the central bank to further lean on its alternative tools. In this regard, revisions to its reserve requirements tool, credit growth caps and banking regulations are all in play to help keep financial conditions restrictive.”

— Selva Bahar Baziki, economist. Click here to read more.

Turkey’s policy path is clearer after riding out a bout of market turbulence ahead of local elections in late March that eroded foreign reserves and put pressure on the local currency. The lira has appreciated about 0.6% against the dollar since then, with the central bank sharply improving its net reserves — excluding swaps with commercial lenders — as inflows picked up.

Despite a record increase in the net FX position since March, “the lira has also remained highly stable, supporting disinflation,” Goldman Sachs Group Inc. economists including Kevin Daly said in a report.

But while lira credit growth has decelerated and de-dollarization of bank deposits is taking hold, foreign-exchange lending is expanding at a faster clip.

“FX stability is allowing for more risk taking,” Bank of America Corp. economist Zumrut Imamoglu said in a note. “Although macroprudential measures have been very effective on lira loan growth, the central bank might bring new measures to curb FX loan growth and credit card spending if inflation inertia proves stronger than expected in the coming months.”

Should policy rates remain on hold for the foreseeable future, the focus will increasingly shift to a planned fiscal adjustment and alternative tightening tools.

When it comes to monetary policy, Morgan Stanley economist Hande Kucuk said additional measures would focus on liquidity with possible steps such as an increase to the reserve requirement ratio “to support the transmission of the policy rate to the interbank rate and to broader financial conditions.”

Other challenges abound. Consumer spending and sticky services inflation remain too strong for the liking of officials. Karahan has said the central bank believes tighter monetary policy — which works with a lag — will help cool off domestic demand into the second half of the year.

“We are yet to see a marked slowdown in domestic demand and inflation,” Kucuk said. “Hence, we expect the MPC to keep the door open for further hikes against risks to its projected disinflation path.”

--With assistance from Joel Rinneby.

(Updates with Goldman’s comment in eighth paragraph.)

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