Turkey’s central bank kept its main interest rate unchanged for a third consecutive time since the outbreak of the Iran war, signaling it’s comfortable with the current stance favored by a cooling economy.
The Monetary Policy Committee, led by Governor Fatih Karahan, held the one-week repo rate at 37% on Thursday. It also maintained the overnight lending rate — which has been its main funding facility since the conflict began — at 40%.
A majority of economists in a Bloomberg survey predicted a hold.
By maintaining the status quo, in which the bank uses the higher alternative rate without an outright rate hike, policymakers expressed confidence that economic conditions are tight enough to avoid derailing disinflation efforts and that the effect from the war will be temporary.
“First quarter data point to a slowdown in economic activity, and leading indicators suggest a continued weak course in domestic demand,” the MPC said in a statement accompanying the decision. It added that despite headline price increases, seasonally adjusted inflation slightly improved in May.
The central bank took steps last month to tighten limits on credit growth. First-quarter gross domestic product data also pointed to a slowdown in the economy.
Turkey, a major oil and natural gas importer, has faced a surge in energy costs after the Strait of Hormuz was effectively closed. These prices have contributed to annual inflation accelerating for two straight months to 32.6%.
In its statement, the MPC acknowledged “volatile and elevated” energy prices, saying it’s closely monitoring the developments in the Middle East as well as their impact on economic activity, expectations and costs.
“We expect the inflation to start to decline in June, potentially opening the door for easing in the third quarter,” said Zumrut Imamoglu, senior Turkey economist at Nomura Holdings. “We think that the bank will continue to be cautious and flexible by keeping the funding rate high as long as necessary.”
Most economists see inflation ending the year around 30% — a more pessimistic outlook than the central bank’s forecast of 26%.
The decision and accompanying statement suggest that the central bank “is comfortable with the current level of monetary tightness, but is preparing markets for a prolonged pause in the easing cycle,” said Tufan Comert, executive director of global markets strategy at BBVA.
The lira was little changed after the decision, trading at 46.16 per US dollar at 2.30pm in Istanbul.
A minority group of economists had predicted a hike to offset the impact of the prolonged war in the Middle East and of recent domestic political turbulence, which caused the central bank to spend about $13bn to defend the lira. Citigroup Inc analysts said they were reducing their exposure to the Turkish lira, citing the deterioration in the inflation outlook on the back of higher oil prices.
Erkin Isik, the chief economist of QNB Turkey, said the central bank adopted a cautious stance against inflation risks. “Despite the slowdown in economic activity, the bank is refraining from signaling guidance on early easing,” he said.
