Turkey Hones Rates Message for New Policy Era Riddled With Angst
(Bloomberg) -- Turkish inflation is finally close to peaking but the central bank’s worry is here to stay, a disquiet that might keep interest rates higher for longer.
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A revised outlook presented by officials on Thursday showed inflation ending 2024 at 38% — up from a previous forecast of 36% — and left next year’s estimate at 14%. Speaking at a quarterly presentation in Ankara, Governor Fatih Karahan reiterated hawkish messaging and signaled the central bank is ready to tighten monetary policy further if needed, saying its duty is to be cautious.
It’s a worry born out of inflation and currency crises that have forced officials to rewrite the playbook for steering the $1.1 trillion economy. Karahan’s deputy, Cevdet Akcay, said Turkey’s central bank is “in the anxiety industry” and doesn’t want to rely on a “good scenario” to chart the way forward.
Following the revision, this year’s outlook still remains relatively optimistic but aligns more closely with the views of most economists. The central bank kept the upper bound of its forecast range unchanged at 42%.
“The central bank’s inflation forecast change for 2024 means that the bank is realistic and the likelihood of early rate cuts is very low,” said Tufan Comert, BBVA’s strategy director for the Middle East and North Africa.
Karahan repeated that the central bank will do “whatever it takes” to fight inflation and attributed the tweak in the outlook to stronger domestic demand than expected. As he spoke, the lira reversed earlier losses against the dollar and traded little changed as of 2:03 p.m. local time.
Meanwhile 10-year government bonds extended their rally during the presentation, with the yield falling 66 basis points to 27.64%, a three week-low.
Almost a year into Turkey’s embrace of more conventional economics, the central bank is signaling no letup in its effort to win back the confidence of markets. It’s already lifted its key rate to 50% from 8.5% last June and has been taking steps to wind down some of the unorthodox policies inherited from previous leadership.
Hours before the presentation on Thursday, authorities announced they were scrapping a regulation that forced banks to buy lira-denominated government securities if they failed to meet certain ratios for raising deposits in the currency. It was among rules designed to prop up the local currency and long drew criticism from bankers and investors.
Karahan said price growth has exceeded forecasts over the past three months but policymakers “will definitely not allow a permanent deterioration in the inflation outlook.” The central bank is determined to maintain a tight monetary policy stance until inflation falls to levels consistent with the target, he said.
The central bank is now largely able to ensure the transmission of rates into the economy after its 500 basis-point hike in March, Akcay said.
What Bloomberg Economics Says...
“The central bank’s inflation report confirms our view that policymakers will continue to restrict financial conditions, with additional tightening likely to come via alternative tools rather than rate hikes. The revised end-2024 inflation forecast remains below our year-end estimate.”
— Selva Bahar Baziki, economist. Click here to read more.
Though Turkey is still having to contend with one of the world’s fastest rates of price growth, disinflation will likely set in from June thanks to the statistical effect of a high base from 2023 and as nine rate hikes filter through to the economy. Elevated inflation expectations and brisk domestic demand are among the obstacles that stand in the way.
Economists are split over the possible timing of rate cuts, with most analysts surveyed by Bloomberg predicting no easing until the fourth quarter. But BBVA’s Comert says the benchmark is set to stay at 50% “at least” until the end of the year.
It’s an approach policymakers might complement with “some more liquidity tightening” that will push up the cost of funding for lenders to the 53% upper limit of the central bank’s rate corridor, he said.
--With assistance from Tugce Ozsoy and Ugur Yilmaz.
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