Turkey’s central bank holds rates steady at 50 per cent

Turkey’s central bank held its policy rate steady at 50 per cent on Tuesday as expected and repeated it remains highly attentive to inflation risks, even as it expects disinflation to gain strength after a welcome turnaround last month.

The central bank last raised interest rates in March, by 500 basis points, and has since held steady while vowing to tighten policy more if it predicts the inflation outlook will worsen, a hawkish pledge it repeated on Tuesday.

Most analysts expect rate cuts to begin before year end, though some expect the central bank will wait longer.

Starting to see results from a year-long tightening drive, the bank said the underlying monthly inflation trend showed a notable decline in June, though added that it could rise “temporarily” this month due to one-off factors.

“The decisiveness regarding tight monetary stance will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations,” its monetary policy committee said.

“As a result, the disinflation process will gain strength.”

Since June last year, the bank has raised its policy rate (TRINT=ECI) by a total 4,150 basis points in a tightening cycle that reversed years of monetary stimulus supported by President Tayyip Erdogan to boost economic growth.

Turkey’s annual inflation rate began what is expected to be a sustained fall in June, dipping to 71.6 per cent. Officials and analysts predict a gradual decline in the remainder of 2024 with economists forecasting a year-end level of around 43 per cent.

“Leading indicators suggest that monthly inflation will rise temporarily in July due to adjustments in administered prices and taxes as well as supply-side factors in unprocessed food prices,” the bank said.

In a Reuters poll last week, all 26 economists expected the central bank to hold rates this month and not to ease until the next quarter. The policy rate was expected to drop by 500 basis points to 45 per centby the end of 2024.

No significant easing in rates was expected to come until next year, the poll showed, with the central bank forecast to reduce rates by 2,250 basis points to 27.50 per cent by end-2025.

S&P Global Market Intelligence said in a note that it expects “a cautious cutting cycle” to begin in December.

Many Turks are struggling with eroding living standards after six years of soaring inflation, combined with a sharp clampdown on credit over the last year, which has left them paying the price for past economic missteps.

Before he backed last year’s policy reversal, Erdogan had championed a low rates policy for five years to lift economic growth despite soaring prices, which led to the lira shedding more than 85 per cent to the dollar since 2018.

The lira was little changed at 32.9450 against the dollar after the rates decision.

The central bank added that the monetary transmission mechanism will continue to be supported via additional macroprudential measures, while sterilization will be implemented effectively by adding to the tool set whenever needed.