Bloomberg – the central bank of Turkey kept its benchmark interest rate unchanged on Thursday, pausing an easing cycle that had helped push inflation to its highest level since the start of President Recep Tayyip Erdogan’s reign.
The monetary policy committee kept the one-week repo rate at 14%, as expected by the 20 analysts polled by Bloomberg.
While most emerging markets have begun to tighten monetary policy in recent months to contain global price pressures, Turkey has cut its rate by 500 basis points since September, a round of aggressive easing needed as part of Erdogan’s bid to boost growth and reorient the economy towards manufacturing and exports.
In Thursday’s statement, the central bank refrained from committing to a timetable for this approach after pledging in December to avoid rate cuts in the first quarter of 2022. The monetary authority said it would carry out a comprehensive review of the policy framework “with the aim of prioritizing the Turkish lira in all policy tools.”
The recent rise in inflation has been driven “by the distorted behavior of prices due to unhealthy price formations in the foreign exchange market, supply-side factors such as rising world food and agricultural prices, supply constraints and changing demand. the statement said.
The lira was up 0.4% against the dollar at 13.3772 at 2:15 p.m. local time, after rising 1.2% after the decision was announced.
Holding rates could have posed risks for Governor Sahap Kavcioglu as Erdogan has sacked three central bank chiefs since 2019 amid disagreements over the direction of Turkey’s monetary policy. But the president softened his tone in recent comments, saying borrowing costs would gradually decline in 2022 and the lira would slowly strengthen.
Erdogan’s comments echoed those of Treasury and Finance Minister Nureddin Nebati, who said Bloomberg last week that policymakers would wait to see how the economy would react in the first quarter to the latest wave of easing. The central bank had signaled last year that the December rate cut would likely be the last in the current cycle.
Erdogan, who calls himself an “enemy” of high interest rates, exerted intense pressure last year to cut borrowing costs, triggering an unprecedented plunge in the lira.
Turkish currency lost up to half its value in three months before stabilizing after the government introduced emergency measures in December, including a program to compensate lira holders in the event of sharp falls in the currency.
But the depreciation of the lira, combined with rising global energy prices, has already translated into higher prices and a deteriorating outlook.
The inflation rate reached 36.1% in December. Inflation expectations for the next 12 months have risen to 25.37% from 21.39%, according to the central bank’s January survey of market participants. Some Wall Street banks are predicting last year’s currency crisis could push inflation past 50%, although Nebati says it will peak sooner and at a much lower rate.
The central bank’s priorities of pleasing Erdogan with interest rate cuts and stabilizing the lira are incompatible, said Phoenix Kalen, global head of Societe Generale EM Research, ahead of the rate decision.
“Given the high price they will have to pay in terms of depleted foreign exchange reserves, our base case is that interest rates remain unchanged at the current level of 14% this year,” he said. .
On January 27, Kavcioglu will update the bank’s baseline scenario for inflation through 2022 and the next two years. The central bank currently expects consumer price growth to end at 11.8% in 2022, according to its latest inflation report released in October.
The statistics agency will release January inflation data on February 3.
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