Business Maverick

Business Maverick

Turkey set on ultra-loose course after shock rate cut

Turkey set on ultra-loose course after shock rate cut
The Sturgeon full moon rises next to Istanbul's Camlica Mosque on 11 August 2022 in Istanbul, Turkey. The Sturgeon Moon is the last super-moon of 2022. (Photo by Chris McGrath/Getty Images)

The country’s central bank isn’t about to reverse course after a shock decision to cut interest rates last month and may even surprise by easing monetary policy again despite raging inflation.

Elections less than a year from now are likely to set the tone for policy makers because President Recep Tayyip Erdogan is counting on ultra-loose money to pump up economic growth and create new jobs. The insistence on keeping borrowing costs low means another rate cut could be in the cards.

While most economists surveyed by Bloomberg predict the benchmark will stay at 13% on Thursday, a minority that includes Morgan Stanley, UniCredit SpA and Citigroup expects the Monetary Policy Committee to lower it again, with forecasts ranging from 50 basis points to a full percentage point.

“Turkey is now entering election economics,” said Tugberk Citilci, head of research at Istanbul-based InvestAZ Menkul Degerler, who sees a 100 basis-point decrease.

Erdogan and his ally at the central bank, governor Sahap Kavcioglu, are sticking to an unorthodox playbook that resists rate hikes to contain inflation. The approach has encouraged economic growth at the expense of price stability and left Turkish assets more vulnerable to sell-offs.

As a result, annual inflation has shot past 80%, a level last seen in 1998, while the lira trades near record lows. 

Still, the MPC last month signalled it was responding to a loss of economic momentum and didn’t plan to embark on a new easing cycle, saying “the updated level of the policy rate is adequate under the current outlook”. 

For many economists, the messaging suggested no additional rate cut was likely until later. 

Policy guidance

“We interpret August’s rate cut not as guidance from the bank that rates will be cut further but as a signal that policy will not be tightened or that lending conditions are to be loosened,” Goldman Sachs Group economists including Clemens Grafe said in a report.

Kavcioglu, in a blog post last week, repeated that macroprudential measures and policies aimed at widening the use of the lira will be used to achieve price stability. He’s the fourth central bank governor since 2019 after Erdogan fired three predecessors.

Selva Bahar Baziki from Bloomberg Economics said, “We see the bank pressing on with macroprudential tools to curb and direct credit growth, and predict a further rate cut in 4Q, if the recent slowdown in leading indicators continues.” 

The central bank, which says it remains committed to its 5% inflation target, cut rates multiple times under Kavcioglu’s leadership late last year when annual price increases were already running in double digits. 

With slower growth in industrial production showing the economy is coming under pressure, policy makers may counter already this week by cutting rates by 100 basis points, according to London-based UniCredit economists Dan Bucsa and Gokce Celik. 

A pause couldn’t be ruled out but “in either case, we think additional rate cuts are likely until the elections”, they said. BM


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