Turkey’s central bank maintains interest rates, which is worrying for investors

Turkish lira

Mehmet Kalkan

The Turkish Monetary Policy Committee on Thursday chose to keep its key interest rate unchanged at 19%, a move widely expected by the markets.

While not surprising to investors looking to the central bank, the subdued signal nonetheless risks more volatility for the country’s currency as it virtually limits the likelihood of higher interest rates in the future to curb Turkey’s double-digit inflation. takes away completely.

“We think removing the tightening against rising inflation expectations suggests that the TCMB (Turkish central bank) now has a more moderate response function,” Goldman Sachs wrote in a note on Thursday, emphasizing that the bank has crucially removed its bias . toward tightening interest rates from the press release.

“That’s why we see a higher risk of an early rate cut or easing through increased lending,” Goldman said, although the investment bank doesn’t see the country have room to cut rates further until the fourth quarter of this year.

The Turkish lira has lost significant value over the past 12 months as the local population can afford fewer goods and imports are more expensive due to what analysts describe as Turkish President Recep Tayyip Erdogan’s persistent refusal to raise tariffs. as well as declining foreign exchange reserves and a growing current account deficit. Contrary to popular economic belief, Erdogan believes interest rates are “bad” and cause inflation, rather than the other way around.

The dollar has gained more than 8% against the lira since the beginning of the year. Inflation in Turkey is currently 15%.

The Turkish lira fell about 16% in one day on March 22 after Erdogan fired former central bank chief Naci Agbal, who had significantly hiked interest rates during his less than five months of service – something most investors were it. agree that it was necessary to cool Turkey’s frothy inflation. .

Erdogan replaced him with Sahap Kavcioglu, now the fourth central bank chief in two years, who is believed to be more lenient to Ergodan’s demands and a tendency to pull politics into monetary policy.

Timothy Ash, senior emerging markets strategist at Bluebay Asset Management, described the central bank’s latest move as “clearing the deck to cut at the earliest opportunity”.

“Inflation is rising, the current account is getting bigger and reserves are falling,” he wrote in a note on Thursday. “How can the CBRT cut without sacrificing the lira?”

Goldman Sachs sees inflation as high as 18% yoy in April and expects the country’s current account deficit to widen. “An early rate cut in these circumstances could lead to renewed volatility in the lira, which we believe will be the main constraint on how early the TCMB eases,” the bank wrote.