Turkey may cut interest rates to 11 percent, below inflation - columnist

Turkey’s central bank will probably reduce interest rates to below current inflation, columnist Ali Ağaoğlu said in the Milliyet newspaper.

Policymakers meeting on Thursday may decide to cut the benchmark one-week repo rate by 100 basis points to 11 percent in a continuation of their front-loaded reductions, Ağaoğlu said on Monday.

Turkey’s central bank has slashed interest rates in half from 24 percent in July, when President Recep Tayyip Erdoğan sacked and replaced its governor for failing to support the government’s pro-economic growth policies. Annual inflation slowed from 16.7 percent in July to as little as 8.6 percent in October, before accelerating in November and December to the current 11.8 percent.

Ağaoğlu said there is now a discrepancy between the lower interest rates charged by banks on loans and the central bank’s base rate, with the former averaging between 10 percent and 10.5 percent on short-term lending. That gap needs to close, one way or the other, he said.

The Turkish government has instructed state-run banks to slash the cost of lending for businesses and consumers to help revive economic activity and to meet an economic growth target of 5 percent this year. Banks’ interest rates, rather than the central bank’s base rate, are now becoming a more dominant force, Ağaoğlu suggested.  

Ağaoğlu said that his prediction for this week’s rate cut was based on what he thought the central bank would do, not what he thought it should do to help contain inflation, which is not expected to slow to any significant degree in the first months of this year. Erdoğan claims higher interest rates are inflationary and has said he expects them to come down to single digits this year, helping inflation to do the same.

The Turkish monetary authorities are being helped by a favourable outlook for emerging market assets - the U.S. Federal Reserve is now pausing before deciding whether to raise interest rates and a crisis between the United States and Iran has abated quickly, Ağaoğlu said.

Still, despite there being a potential 275 basis points of rate cuts in the pipeline in Turkey this year, the central bank is not likely to act too hastily, Ağaoğlu said. The bank’s re-introduction of monthly interest rate meetings, while giving it more flexibility on monetary policy, may pressure it to take action on interest rates more often, he said.