Turkey’s shackled central bank keeps rates steady even after inflation climbs

Turkey's central bank left its benchmark interest rate unchanged on Wednesday, matching a unanimous prediction by economists, even after inflation accelerated to a two-year high.

Monetary policymakers decided to keep rates steady at 19 percent, the central bank said on its website.

Central bank governor Şahap Kavcıoğlu, hired by President Recep Tayyip Erdoğan in March, says he will keep interest rates at a level above current and expected consumer price inflation, which accelerated to 17.5 percent last month. But Kavcıoğlu's authority to increase rates if needed has been undercut by Erdoğan's opposition to higher borrowing costs and his dismissal of three governors in two years. 

In early June, Erdoğan called for a rate cut in July or August, saying higher interest rates were inflationary as they increased costs for businesses. His statement pushed the lira to a record low beyond 8.8 per dollar.

Economists polled by Reuters and Bloomberg all predicted no change in interest rates at Wednesday’s Monetary Policy Committee meeting. Only one of 14 is now predicting a reduction in interest rates in August due to inflationary pressures, Bloomberg said. 

Turkey’s consumer price inflation rate has risen to the highest level in major emerging markets outside of crisis-hit Argentina after the government engineered a borrowing boom last year and manufacturers curtailed production due to COVID-19. Producer price inflation accelerated to 42.9 percent last month. Many economists expect inflation to nudge up again in July.

"Taking into account the high levels of inflation and inflation expectations, the current tight monetary policy stance will be maintained decisively," the central bank said in a statement explaining its decision. 

"The CBRT will continue to use decisively all available instruments in pursuit of the primary objective of price stability," it said.

"Meaningless reference to tight policy when governor Kavcıoğlu is not even brave enough to say he is willing to hike rates," said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London. "He is a hawk with his claws removed, and wings clipped."

On Monday, Erdoğan spoke of how his government’s policies were spurring an economic expansion in the country. Erdoğan’s pro-growth, anti-interest rate rhetoric has pressured the lira, which has lost 15 percent of its value since March, when the president fired Kavcıoğlu’s more hawkish predecessor.

The lira was trading up 0.1 percent at 8.62 per dollar after the central bank announcement. The currency is expected to weaken to around 9 per dollar by the end of the year, according to consensus estimates in a central bank survey of market participants published this month.