Turkey’s central bank yesterday held its key interest rate steady at 24%, appearing to pave the way for a rate cut soon as it signalled growing confidence that inflation, which hit 15-year highs in October, is on a downward curve.
After its previous monetary policy meeting in April the bank, which has faced pressure in the past to cut interest rates to boost economic growth, cited only “some improvement in inflation indicators”.
It said then that its tight policy stance would be maintained until the inflation outlook “displays significant improvement.”
Annual inflation eased to 18.71% in May, and yesterday the bank said its tight policy was intended to “contain the risks to the pricing behaviour and to reinforce the disinflation process” — interpreted as a somewhat more upbeat assessment.
The central bank hiked its benchmark one-week repo rate by 11.25 percentage points last year, last raising it in September to support the lira in the face of a currency crisis that has tipped the economy into recession.
The following month inflation peaked at 25.24%, its highest since 2004, and has been trending lower since.
“We think the central bank is signalling a possible rate cut in the coming months with these amendments,” said Muammer Komurcuoglu, research director at Is Investment.
The lira, inflation outlook, global risk appetite and Turkish-US tensions would be monitored until the next policy meeting on July 25. “Positive news on these fronts would bring forward our first rate cut expectation to July from September,” he said.
In a Reuters poll, 14 of 16 economists had said they expected the bank to hold the repo rate yesterday.
The lira firmed to 5.7820 against the dollar after the central bank announcement, from 5.8155.
The currency has partially rebounded from levels above 6 against the dollar this month as concerns about US-Turkey ties eased somewhat.
The bank had also made a dovish shift at its April 25 meeting, dropping a previous reference to possible further tightening if needed to address inflation.
The lira fell as a result.
Last year it weakened nearly 30% against the dollar over worries about diplomatic tensions with Washington and the central bank’s independence.
State broadcaster TRT Haber said yesterday 12 Turkish banks will offer companies a total of 25bn lira ($4.31bn) as part of a Treasury-backed loan package, in what would be Ankara’s latest effort to boost lending. The currency has weakened another 9% this year on renewed US strains and political uncertainty generated by a re-run on June 23 of a mayoral election in Istanbul, after the AK Party narrowly lost the initial vote.
When presenting the bank’s quarterly inflation report on April 30, governor Murat Cetinkaya said interest rate hikes remained an option if inflation unexpectedly jumps, but kept the year-end inflation forecast unchanged at 14.6%.
In the Reuters poll, one economist predicted that the central bank would lower the repo rate to 23.5%, while another estimated that it will be cut to 23.25%.
The median estimate in the poll for the central bank’s year-end policy rate stood at 21.5%, unchanged from April, with forecasts ranging between 17.5% and 24%.
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