Turkey c.bank holds rates at 50%, maintains tight grip on inflation

Turkey’s central bank extended on Tuesday its interest rate hold for a fourth month, emphasising its commitment to fighting inflation.

The Central Bank of the Republic of Turkey’s (TCMB) Monetary Policy Committee (MPC) decided to keep the policy rate (the one-week repo auction rate) constant at 50 percent.

Despite a slight slowdown in June, consumer inflation remains significantly above the target of 5 per cent, with the Monetary Policy Committee warning that monthly inflation “will rise temporarily” in July.

“In addition to the high level of and the stickiness in services inflation, inflation expectations, geopolitical risks, and food prices keep inflationary pressures alive,” the MPC said in a statement.

TCMB cited several factors keeping inflationary pressures alive; including the high services inflation, persistent inflation expectations, geopolitical risks, and rising food prices.

Ruling out possibilities of premature easing, Governor Fatih Karahan said in the TCMB’s monetary policy committee statement that he aims to ensure inflation control beyond 2023 before considering rate cuts.

Karahan said hikes in electricity prices and taxes alone would add 1.5 percentage point to monthly inflation in July.

The country annual inflation is still expected to slow from its current level of just under 72 per cent due to the so-called base effect of comparing prices with the previous year’s rapid gains.

Turkey is targeting 14 per cent inflation by the end of next year, while households see the figure at 71.5 per cent in 12 months, a gap the TCMB believes is perpetuating a cycle of rising prices.

With interest rates unchanged, policymakers will likely continue focusing on reducing excess Turkish lira liquidity through other measures.

Moody’s recent upgrade of Turkey’s credit rating by two notches acknowledged the improved credibility of TCMB’s monetary policy. However, the rating is still four levels below investment grade. Morgan Stanley suggests the upgrade might allure foreign investment, but lasting confidence will prompt seeing significant and sustained inflation control.

Attribution: Bloomberg and TCMB statement