Turkey’s rate-setters opted to hold the central bank’s benchmark (one-week repo) at 24% at their January 16 Monetary Policy Committee (MPC) meeting as widely expected, the regulator announced in a press release.
Responding to the rates decision, Muhammet Mercan of ING Bank said in a note: “The accompanying statement includes some minor changes from the previous month’s [MPC meeting] note. The [central bank] maintained the main policy guidance that highlights its determination to tighten further, if needed. One addition to the statement is related to the external outlook as the bank expects the current account balance to ‘maintain its improving trend’. This is hardly surprising, given weakening domestic demand and deleveraging in the banking sector.”
The Turkish lira (TRY) strengthened by 1.31% d/d to trade at 5.3715 as of around 17:00 local time while the Istanbul stock exchange benchmark BIST-100 index rose by 1.85% d/d thanks to a 6.04% gain on the banking index.
The second MPC meeting of 2019 will take place three and a half weeks before the March 31 local elections, on March 6 and the third will be held on April 25.
In another reaction to the decision to hold rates, Jason Tuvey of Capital Economics wrote: “We still think that an easing cycle is not too far away. For one thing, inflation is likely to edge down further… to around 18% y/y over the next few months, before dropping sharply around the middle of the year… What’s more, the central bank will release its latest Inflation Report at the end of January which will almost certainly include some downward revisions to its inflation forecasts. That might provide the MPC with some justification to start lowering interest rates."
Political pressure "to build"
Tuvey added: "Meanwhile, the next few months are likely to bring more evidence that the Turkish economy is in the midst of a deep recession... Finally, political pressure for looser monetary policy is likely to build. There are already signs that the government is gearing up for local elections…, including attempts to get credit channels flowing again… Monetary policy decisions will continue to be heavily influenced by swings in the lira. But assuming the currency holds up well in the next couple of months, we think that the MPC will embark on an easing cycle at its next meeting in early March. Further out, we expect the one-week repo rate to be lowered to 20.00% by the end of this year.”
Tim Ash, senior emerging markets sovereign strategist at Bluebay Asset Management, advised investors: “March 6 could be a more difficult call, but unless inflation tanks, I cannot see them cutting even then. The CBRT [Central Bank of the Republic of Turkey] is still in rebuilding mode, in terms of its own credibility. After a disastrous 2018, it’s going to be a long haul. Indeed, after not hiking quickly enough in 2018, the price now will be that the CBRT will be forced to be slow to ease policy rates—and that means the real economy will bear a heavy burden for policy mistakes in 2018.”
Ozlem Bayraktar Goksen of Tacirler Invest said in a research note: “We believe that the weak demand environment and electricity/natural gas price cuts will play supportive roles on headline in January. However, there is still some uncertainty regarding at what level the recent tax adjustment on tobacco prices will be reflected in end-prices. In addition, the recent uptrend in Brent oil prices together with some depreciation in TL [Turkish lira] since the beginning of the year have resulted in fuel oil price increases, which will add to the January CPI. Under these circumstances, we believe that inflation will remain at around 20-21% levels towards May… for March 6, our base case scenario incorporates no change in the policy rate again.”
BBVA Research said in a research note: “We estimate that headline inflation could stay above 20% in the first half of the year, before decelerating much faster afterwards on base effects and lagged effects of the deeper negative output gap. We think that the CBRT should wait [until June] to achieve a sizable improvement in the inflation outlook and inflation expectations as they are still above the CBRT’s interim targets.”
Inflation is running at around four times the CBRT’s target level.