Turkey: Central bank resists Erdogan’s calls for rate cut

The Turkish lira rallied after the country’s central bank resisted President Recep Erdogan’s calls for an interest rate cut and kept its benchmark rate unchanged.

Thursday's rate decision could set central bank Governor Sahap Kavcioglu on a possible collision course with Erdogan, who holds the unorthodox view that higher interest rates fuel consumer price gains and is seeking lower borrowing costs to fuel economic growth [File: Nicole Tung/Bloomberg]

The Turkish lira rallied to lead gains among emerging-market peers after Turkey’s central bank held its benchmark interest rate, defying President Recep Tayyip Erdogan’s calls for a cut.

The currency rose as much as 1.2% after the Monetary Policy Committee held its one-week repo rate at 19% for a fifth month as forecast by all 20 analysts surveyed by Bloomberg.

The decision appeased traders who were concerned that the policy maker would succumb to political pressure and lower borrowing costs despite the deteriorating outlook for inflation. Consumer-price gains accelerated to 18.95% in July, virtually wiping out Turkey’s real policy rate.

The benchmark 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% target is reached,” the central bank said.

Yet the move now sets Governor Sahap Kavcioglu on a possible collision course with the president, who holds the unorthodox view that higher interest-rates fuel consumer-price gains and is seeking lower borrowing costs to fuel growth. Erdogan has fired three of the previous bank governors.

Positive Yield

“With analysts expecting inflation to continue rising, upcoming CBRT meetings will continue to pose event risk for lira traders,” said Simon Harvey, a senior currency analyst in London at Monex Europe.

The currency has depreciated around 16% since Kavcioglu’s appointment in March, compounding the rise in consumer prices that have been driven by a weak lira, rising commodity prices and a drought that badly affected harvests.

The lira was trading 0.8% higher at 8.5633 per dollar at 3:45 p.m. in Istanbul, after weakening more than 4% over the past week to a low of 8.6815 per dollar on Wednesday, spurred by Erdogan’s latest calls for lower borrowing costs.

“An easing cycle is unlikely to commence until late this year when inflation looks set to fall sharply as the effects of previous falls in the lira start to unwind,” said Jason Tuvey, a senior emerging-markets economist at Capital Economics, adding that inflation is likely to remain elevated at 18-19% over the next few months.

(Updates with analyst comments.)

Source: Bloomberg

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