Turkey’s central bank on April 15 held its benchmark rate at 19% but the language in the announcement relaying the decision left many analysts anxious that it is preparing the way for monetary loosening despite the country’s persistent double-digit inflation.
William Jackson, chief emerging markets economist at Capital Economics, said in a note to investors that “the language … suggests that they are looking for opportunities to lower interest rates and we suspect that an easing cycle will begin in the next few months”.
He added: “Rather than saying that the tight monetary stance would be ‘maintained decisively’ until that is reached, the statement only talked about keeping real interest rates higher than inflation. With the one-week repo rate at 19.0% and inflation at 16.2%, that already offers scope to cut. Accordingly, while this decision suggests that the risks to our year-end forecast for the one-week repo rate to be cut to 10.0% by year-end now lie to the upside, significant easing still appears to be on the cards.”
The shock dismissal last month by presidential decree of central bank governor Naci Agbal—who in his four months at the helm won favour with global markets by introducing 875 bp of rate hikes despite Turkey having a president, Recep Tayyip Erdogan, who regularly promotes unorthodox economic theories for why Turkey’s rates should be kept low—left investors fearing that his successor Sahap Kavcioglu—who himself has espoused ‘Erdoganomics’—would quickly move to unwind the country’s high cost of capital. However, with the Turkish lira down by around 10% against the dollar since the previous rates meeting and an increase in the official inflation rate posted for March, Kavcioglu may have backed away from easing for now.
Sent a signal
Nevertheless, Kavcioglu has sent a signal that higher rates are not on the cards. And the reaction of the global markets to that was telling. “We think that the removal of the tightening bias against rising inflation expectations suggests that the TCMB [Turkish Central Bank] now has a more dovish reaction function,” Goldman Sachs wrote in a note.
“Hence, we see higher risks of a premature rate cut or easing through increased lending,” Goldman added, though the investment bank did not see Turkey having room to cut interest rates any further until the fourth quarter of this year.
Goldman Sachs said it saw inflation rising toward 18% y/y in April and anticipated that the country’s current account deficit would widen. “A premature rate cut under these conditions could lead to renewed lira volatility, which we think will be the main constraint to how early the TCMB eases,” the bank wrote.
"Clearing the deck"
Timothy Ash, senior emerging markets strategist at Bluebay Asset Management, described the central bank’s latest move as “clearing the deck to cut at the first opportunity”.
“Inflation is rising, the current account is widening, and reserves are falling,” he said in a note. “How can the CBRT [Turkish central bank] cut without sacrificing the lira?”
On the inflation front, Capital forecasts that the headline rate will dip in Q2 as falls in core and food inflation offset a sharp pick-up in energy inflation. “It should fall more substantially later in the year as the effects of sharp falls in the lira begin to unwind,” said Jackson.
He added: “In terms of the economic data, the language in today’s accompanying statement about economic developments was surprisingly upbeat, mentioning that ‘domestic activity is strong’. Our own reading is that the economy is starting to slow more abruptly. The hard activity data for February showed that the economy had already started to lose momentum.
“What’s more, the outlook for the second quarter has taken a turn for the worse amid a surge in new virus cases. Restrictions have been tightened as a result. On balance, then, the outlook for growth and inflation suggest that an easing cycle might begin in the coming months, with more substantial easing coming towards the end of 2021.”
Some key dates ahead are April 24, US President Joe Biden may announce whether or not he will recognise Turkey’s mass WWI killing of Armenian civilians as “genocide”; April 29, Kavcioglu’s first inflation report and end-2021 inflation forecast; May 3, announcement of official inflation rate for April; and May 6, next rate-setting meeting.