Turkey Holds Rates After Serial Hikes Under New Central Banker

People walk near Grand bazaar, in Istanbul. Photographer: Ozan Kose/AFP/Getty Images
People walk near Grand bazaar, in Istanbul. Photographer: Ozan Kose/AFP/Getty Images

(Bloomberg) -- Turkey’s central bank left its benchmark interest rate unchanged at the first monetary policy meeting of the year, after two consecutive hikes bolstered its inflation-fighting credentials.

The Monetary Policy Committee left its key rate at 17% on Thursday, in line with the forecasts of most analysts in a Bloomberg survey. The dissenters, including economists at Morgan Stanley and Societe Generale SA, predicted an increase of 50 to 100 basis points.

The bank said it will keep monetary policy tight for an “extended” period.

Governor Naci Agbal had raised the benchmark by a cumulative 675 basis points since his appointment in November, bringing inflation-adjusted rates to well above yields offered by emerging-market peers. His decisions to simplify the bank’s funding structure and end unannounced foreign-exchange interventions by state lenders have earned him enough credit to avoid another rate hike despite last month’s jump in inflation.

“We do not see any fundamental reason for higher rates,” JPMorgan Chase & Co. analysts including Yarkin Cebeci wrote in a report before the decision, citing higher central bank credibility and a stable lira. Cebeci expects the next step to be a 100-basis-point cut in the second quarter, but the exact timing “is strictly conditional” on weaker domestic demand and inflationary pressures, as well as a stable local currency.

The Turkish Treasury’s $3.5 billion Eurobond sale this week before the central bank meeting also supported analysts’ expectation of a rate pause. If policy makers were considering a hike, they “could have chosen to issue the debt after a retreat in exchange rates and risk premium” following the rates decision, said Evren Kirikoglu, an independent market strategist in Istanbul.

Erdogan Factor

Investors remain skeptical about President Recep Tayyip Erdogan’s pledges to follow orthodox policies after his son-in-law Berat Albayrak resigned as economy czar in November. Under Albayrak’s watch, Turkey restricted banks’ lira trade with international institutions while aggressively cutting borrowing costs, triggering a $34 billion outflow of foreign capital from Turkish equities and government bonds.

The Turkish leader provided further ammunition to skeptics last week when he resumed his criticism of high interest rates, reiterating his unorthodox economic hypothesis that they cause inflation.

Turkey’s central bank has consistently missed its inflation target since setting it at 5% in 2012. Last year, consumer inflation exceeded even the central bank’s bumped-up forecast, climbing to 14.6% in December. A weak lira and rapid credit growth driven by negative real-interest rates kept price growth in double digits during 2020.

Elevated levels of inflation tend to send Turkish consumers into dollar assets to protect their savings. In 2020, Turkish residents’ foreign-exchange deposits rose by about 22% to $235.7 billion, following a 20% increase the previous year. Strong demand for dollars weakens the lira, creating additional inflationary pressure.