Economists are unanimous in a prediction that Turkey’s central bank will leave interest rates unchanged at a meeting on Wednesday, citing an upswing in consumer price inflation.
In early June, Turkish President Recep Tayyip Erdoğan called for a rate cut in July or August, saying borrowing costs of 19 percent were inflationary as they increased costs for businesses. But central bank governor Şahap Kavcıoğlu, hired by Erdoğan in March, says he will keep interest rates at above current and expected consumer price inflation, which accelerated to 17.5 percent last month.
A probable uptick in inflation in July means that the central bank is likely to keep borrowing costs on hold, Jason Tuvey, senior emerging markets economist at Capital Economics in London, said in an e-mailed report on Tuesday. The bank will wait until late in the year, when inflation is set to slow sharply, before cutting, he said.
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 predicting a reduction in interest rates in August, Bloomberg said. They are also forecasting smaller rate cuts – a median estimate among 15 economists for the year-end interest rate stood at 17.5 percent versus 16.5 percent previously, Reuters said.
Turkey’s 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. Producer price inflation stood at 42.9 percent last month.
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 he fired Kavcıoğlu’s more hawkish predecessor.
The lira hit a record low beyond 8.8 per dollar at the start of June. It was trading 0.1 percent weaker at 8.62 per dollar on Wednesday morning in Istanbul.
Investors in Turkey are concerned that Erdoğan’s aversion to higher interest rates may prevent the central bank from hiking borrowing costs even if inflation approaches 19 percent, leading to further lira weakness. Erdoğan has sacked three central bank governors in two years.
The lira is expected to trade at 8.99 per dollar by the end of the year, according to the average estimate in a central bank survey of market participants published this month.