Turkey central bank rates decision shrouded in uncertainty

Turkey’s central bank meets on Thursday to decide on interest rates, with economists and pundits undecided on what monetary policymakers will do as an economic recovery gathers pace.

Two polls by Reuters and the state-run Anadolu news agency underscored the uncertainty hanging over the meeting. Thirteen of 21 economists surveyed by Reuters predicted a rate cut, with six expecting the bank to lower interest rates by 100 basis points to 11 percent. Meanwhile 12 of 21 economists interviewed by Anadolu said borrowing costs would remain at 12 percent.

Turkey’s central bank, under pressure from the government to support economic growth, is considering whether to extend a series of rate cuts that have slashed borrowing costs in half from 24 percent in July. Investors in Turkey are concerned that further decreases might increase pressure on the lira, lead to more inflation and make Turkish bonds less attractive.

Ali Ağaoğlu, a columnist for the pro-government Milliyet newspaper, said on Monday that the central bank was likely to reduce interest rates by 100 basis points. His prediction was not based on what the central bank should do, he said, but on what it would probably do. Ağaoğlu also pointed to a discrepancy between the central bank’s benchmark rate of 12 percent and interest rates offered by banks on loans of as low as 10 percent. The two rates looked destined to align, he said.

Turkey’s government has instructed state-run banks to cut interest rates for businesses and consumers to help pull the economy out of a currency crisis that erupted in the summer of 2018 and to achieve an economic growth goal of 5 percent for 2020.

A credit-fuelled recovery is already under way – industrial production expanded at more than 5 percent annually in November, the third-straight increase, and retail sales have jumped, according to official data published on Tuesday.

The central bank may leave rates on hold after an aggressive series of cuts, Muhammet Mercan, ING’s chief economist for Turkey, said in a report on Monday. The decline in interest rate returns from bonds and a recent uptick in inflation poses risks to lira stability, he said.

Still, further easing cannot be ruled out given the bank’s pro-growth policies, Mercan said.  

The lira fell 0.2 percent to 5.886 per dollar in Istanbul on Tuesday. It lost about 12 percent of its value last year, adding to a decline of 28 percent in 2018.

Turkish inflation, which dipped sharply from an annual 25.2 percent in October 2018 to 8.6 percent in October last year as consumer demand slumped, is accelerating again. Consumer price inflation climbed to 11.8 percent in December from 10.6 percent the previous month, just short of the central bank’s target of 12 percent. Inflation is expected to remain at around 12 percent in the first quarter.