Turkey’s central bank kept its benchmark policy rate steady for a fourth consecutive month on Thursday, maintaining its stance amid soaring consumer prices.
Surveys expected the Central Bank of the Republic of Turkey (CBRT) to hold the one-week repo rate at 14%, after it halted a series of rate cuts at the end of last year.
In a statement following the Monetary Policy Committee (MPC) meeting, the central bank said its decision to hold the main interest rate unchanged was driven by expectations of the "disinflation process" starting soon.
Russia's invasion of Ukraine and the aftereffects of the coronavirus pandemic have sparked energy price spikes and production bottlenecks that pushed the U.S. and European cost of living increases to their highest levels in decades.
Led by transportation, including petrol, and food prices, Turkey’s annual inflation rose to 61.14% in March, a new 20-year high. It is expected to rise further to more than 70% in the coming months.
The central bank reiterated that the recent rise in inflation has been driven by “rising energy costs resulting from geopolitical developments, temporary effects of pricing formations that are not supported by economic fundamentals, strong negative supply shocks caused by the rise in global energy, and food and agricultural commodity prices.”
"Concern over global food security, the high course of commodity prices, supply constraints in some sectors that have become more evident, particularly in energy, and high transportation costs have led to producer and consumer price increases internationally," the bank said.
The government has pledged to curb soaring consumer prices to safeguard households and has been taking steps to permanently lower inflation.
In an effort to soften the blow on households, it has implemented tax cuts on basic goods and has readjusted electricity tariffs.
The government says inflation would enter a downward trend and show a lasting fall by the end of 2022.
In comparison, the United States, the United Kingdom and the 19 countries that use the euro currency have seen decades-high levels of inflation – 8.5%, 7% and 7.5%, respectively.
The CBRT reiterated that it “expects (the) disinflation process to start on the back of measures taken and decisively pursued sustainable price and financial stability along with the decline in inflation owing to the base effect and the resolution of the ongoing regional conflict.”
Inflation has surged since last fall amid soaring global commodity and energy prices and as the Turkish lira weakened after the central bank in September embarked on an easing cycle, which saw its policy rate being slashed by 5 percentage points.
The easing had come as the government endorsed a new economic program that prioritizes low borrowing costs, a current account surplus, growth, exports, credit and employment.
Yet, some economists now expect the bank to reverse monetary policy later this year and hike rates due to price pressures and lira weakness.
All 18 economists in the Reuters poll predicted policymakers would keep the one-week repo rate unchanged, though three predicted the bank would begin raising rates later this year.
Four economists predicted that the policy rate will stand at 14% at year-end, with one predicting a further cut to 12% by then. Three economists expected a policy turnaround due to pressure on the lira, high inflation and hikes by other central banks. They separately estimated hikes to 15%, 20% and 25%.
Treasury and Finance Minister Nureddin Nebati last week said Turkey would achieve to pull down inflation “sooner or later,” in a similar way it managed to ensure the stabilization in the foreign exchange and removed interest rates from the agenda.
The lira was down 0.2% at 14.61 a dollar after the central bank decision.
While the cumulative impact of the recent policy decisions is being monitored, the central bank said the comprehensive review of the policy framework continues “with the aim of encouraging permanent and strengthened liraization in all policy tools of the CBRT” to create an institutional basis for sustainable price stability.
The central bank said the MPC decided to “strengthen its macro-prudential policy set," citing strong growth, risks to the current account deficit and the need for growth in long-term investment loans.
The bank said the level of capacity utilization and other leading indicators "show that domestic economic activity remains strong, with the help of more robust external demand even some regional differences emerge."
