Turkey will likely refrain from interest-rate cuts for a second month, leaving the central bank reliant on the rest of its unconventional toolkit to manage loan growth and widen the use of the lira.
(Bloomberg) — Turkey will likely refrain from interest-rate cuts for a second month, leaving the central bank reliant on the rest of its unconventional toolkit to manage loan growth and widen the use of the lira.
The Monetary Policy Committee, led by Governor Sahap Kavcioglu, will keep its benchmark at 9% on Thursday, according to all but one economist surveyed by Bloomberg. President Recep Tayyip Erdogan has pressured the MPC to cut rates into single digits, a goal it achieved in November.
A tangle of regulations has meanwhile sidelined rates in controlling the cost of money and channeling credit across the economy ahead of elections in May. Following four rounds of monetary easing, policymakers said last month that the current rate was “adequate” and signaled new measures to promote the national currency.
“We expect the central bank of Turkey to remain active in the regulation space to encourage liraization and control the composition of loans,” Morgan Stanley economists including Alina Slyusarchuk said in a report last week.
Read more: Turkey Tells Banks to Counter Dwindling Appeal of Lira Deposits
The challenge now is how to ensure that loan rates keep falling while simultaneously driving up demand for liras among Turks. The latest rules introduced at the start of this year look to encourage longer-term deposits and increase the share of local-currency savings.
The inflation outlook has meanwhile grown less dire, thanks in large part to the statistical effect of a high base in 2021. Still, price growth remains about 13 times higher than the central bank’s official target.
Read more: Turkish Finance Czar Rules Out Policy U-Turn After Elections
Treasury and Finance Minister Nureddin Nebati said this month that the issue of inflation had been “resolved.” Price increases in December decelerated at the steepest pace in more than a quarter century, bringing the annual rate to 64% from above 80% in the previous months.
What Bloomberg Economics Says…
“Going forward, we think the central bank will increase its focus on alternative policy tools — such as reserve requirements and securities maintenance — directed credit schemes and banking regulation in the lead-up to mid-year elections as it tries to bolster the lira and reduce inflationary pressures.”
— Selva Bahar Baziki, Turkey economist. Click here to read more.
Kavcioglu will present this year’s first quarterly inflation report next Thursday in Ankara. The central bank governor’s most recent projections showed inflation will end the year at 22.3%.
It’s possible the option of more rate cuts remains on the table. Tugberk Citilci, head of research at Istanbul-based Invest AZ Menkul Degerler A.S., believes conditions may be ripe to resume monetary easing.
“I expect support for exporters and businesspeople as industrial production is low and investments have stopped,” said Citilci, the lone economist in the Bloomberg poll who expects a reduction this week.
–With assistance from Joel Rinneby.
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