Turkey’s central bank, under political pressure from the government to cut interest rates, may be preparing for reductions later this year.
The bank has revised a reference to keeping interest rates “above realised and expected inflation” in its quarterly inflation report published on Thursday. Instead it merely stated that borrowing costs would remain “above inflation”. It has also predicted a sharp slowdown in consumer price inflation of 17.5 percent in the fourth quarter, predicting CPI of 14.1 percent by year-end.
“Is this the pivot to allow them to use forecast inflation to justify a rate cut, even if actual prints are higher?” said Nick Stadtmiller, an emerging markets strategist at Medley Global Advisors.
Turkish President Recep Tayyip Erdoğan has called for rate cuts after sacking central bank governor Naci Ağbal in March. His replacement Şahap Kavcıoğlu has avoided stating whether the central bank would be willing to hike rates should inflation accelerate beyond the benchmark lending rate of 19 percent, which he has kept unchanged over the past four months even as price pressure mounted.
Most finance industry professionals expect inflation to decelerate at a slower pace. CPI is expected to end the year at 15.6 percent, according to the average estimate in a July survey of market participants by the central bank. The forecast, published on a monthly basis, has risen for six-straight months from 11.2 percent in January.
“The policy rate will continue to be determined at a level above inflation to maintain a strong disinflationary effect until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is reached,” Kavcıoğlu said in the report.
Kavcıoğlu called on Turkish companies to limit price increases to help the fight against inflation. Producer price inflation in the country surged to an annual 42.9 percent in June from 38.3 percent in May.
The Turkish Statistical Institute will announce July inflation figures on Tuesday. The central bank will next meet on interest rates on Aug. 12.
“If they are lucky with inflation they are likely to cut too much too soon,” said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London.