Bloomberg / Istanbul
Turkey’s central bank kept its benchmark interest rate unchanged on Thursday, pausing a cycle of rate cuts and launching an “open-ended” policy review after inflation surged to records.
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 seen the value of Turks’ 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 in 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 prioritise 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.
The lira was trading 0.8% higher against the dollar at 13.3194 as of 2.54pm 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.”
The Turkish currency lost as much as half its value in three months before stabilising after the government introduced emergency measures in December, including a programme 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 Treasury and Finance Minister Nureddin 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 January 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 February 3.
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