Turkey’s central bank leaves key interest rate unchanged
Turkey’s Central Bank Monetary Policy Committee on Wednesday decided to keep its policy rate constant at 24 percent, in its last meeting before local elections on March 31.
The committee said in a written statement that recent data showed that the re-balancing trend in the Turkish economy had become more noticeable, with external demand maintaining its relative strength and economic activity deploying a slow pace due to tight financial conditions.
“Developments in import prices and domestic demand conditions have led to some improvement in inflation indicators. Yet, risks on price stability continue to prevail. Accordingly, the Committee has decided to maintain the tight monetary policy stance until inflation outlook displays a significant improvement,” the committee said.
The announcement, which kept the same wording as the previous month's, was likely interpreted by the market as a sign that policy makers intended to keep to a tight policy for the foreseeable future, Turkish economist and Ahval contributor Güldem Atabay said.
In February, Turkey’s inflation rate fell just below the 20 percent threshold, decreasing to an annual 19.67 percent from 20.35 percent in January.
Turkey’s central bank has pledged to keep monetary policy tight following a currency crisis that peaked in August, despite a slowdown in inflation from a 15-year high of 25.2 percent in October. It raised interest rates by 625 basis points to 24 percent in September to prevent provoking a full-blown financial crisis.
The central bank’s decision is in line with expectations among economists earlier that a tax cut before the next quarter of 2019 was unlikely. Bloomberg reported on Tuesday that any change in tight monetary policy would make markets nervous.
"The bank appears committed to tight monetary policy despite the headline CPI inflation having eased from 25 percent year on year back in September to 19.8 percent year on year as of February, as it is still a very high level even among the emerging markets," Atabay said, adding:
"Turkey’s core inflation at 18.1 percent year on year signals that much needs to be done on the inflation front for the CPI inflation to march towards the 5 percent target. Yet, with economic hardship shaking the voter base ahead of the March 31 local polls amidst Turkey’s deepening economic recession; the market fears of renewed pressures from President Erdogan on the central bank of Turkey for a rate cut."
The Central Bank’s announcement came after the U.S. State Department on Tuesday warned Ankara that Turkey’s purchase of Russian S-400 missile systems would result in a reassessment of Turkey’s participation in the F-35 program and risk other potential future arm transfers to Turkey, as well as lead to potential sanctions.
Many expected the U.S. administration’s warning would create a downward pressure on the Turkish lira, which stood at 5.39 against the dollar at 09:01 a.m. on Wednesday. Despite the central bank’s decision to keep key interest rates on hold, the lira fell to 5.42 against the dollar at 4:45 p.m.
The market, Atabay said, remains divided "between an immature rate cut cycle as early as April that could backfire on the lira, or a more rational one that would begin at the start of the second half of the year".