Turkey Doesn’t Budge on Rate With Focus Now on Alternative Tools

Turkey’s central bank left interest rates unchanged on Thursday as it relies on less conventional tools to manage loan growth and promote the use of the lira.

(Bloomberg) —

Turkey’s central bank left interest rates unchanged on Thursday as it relies on less conventional tools to manage loan growth and promote the use of the lira.

The Monetary Policy Committee, led by Governor Sahap Kavcioglu, kept the benchmark at 9% for a second straight month, matching the forecasts of all but one economist in a Bloomberg survey. The decision was in line with the MPC’s guidance last month that described the current level of rates as “adequate.”

The central bank is resorting to instruments other than interest rates to get a grip on inflation that reached nearly a quarter-century high last year. It’s been micro-managing the economy by using regulations to shore up the local currency and intervene in the way commercial lenders extend credit.

Rate cuts between August and November last year brought the official cost of borrowing down by 500 basis points and into single digits. The steps followed explicit calls by President Recep Tayyip Erdogan to ensure money is cheap, which he argues — contrary to mainstream economic theory — will stabilize consumer prices.

What Bloomberg Economics Says… 

“Going forward, we think the central bank will increase its focus on alternative policy tools — such as reserve requirements and securities maintenance — directed credit schemes and banking regulation in the lead-up to mid-year elections as it tries to bolster the lira and reduce inflationary pressures.”

— Selva Bahar Baziki, Turkey economist. Click here to read more.

With presidential and parliamentary elections slated for May, Erdogan is pushing for looser monetary and fiscal policies to fuel demand. The Turkish leader has described rates at their current level as optimal for investment and supporting economic growth.

The challenge for the central bank now is how to ensure that loan rates keep falling while simultaneously driving up demand for liras among Turks. The latest rules introduced at the start of this year look to encourage longer-term deposits and increase the share of local-currency savings.

For now, easy credit hasn’t translated into a lending boom. Private banks are hesitant to provide cheap corporate financing ahead of elections, prompting warnings from policymakers.

Turkey Tells Banks to Counter Dwindling Appeal of Lira Deposits

Risks still abound for inflation. 

With interest rates likely to stay low for longer, fiscal stimulus is emerging as another source of pressure on consumer prices. The government has been increasing public spending through significant hikes to minimum and civil servant wages, pensions and cheap loans packages. 

Kavcioglu will present this year’s first quarterly inflation report next Thursday in Ankara. The central bank governor’s most recent projections showed inflation will end the year at 22.3%.

The inflation outlook has grown less dire recently, thanks in large part to the statistical effect of a high base in 2021. Price growth still remains about 13 times higher than the central bank’s official target.

Turkish Finance Czar Rules Out Policy U-Turn After Elections

Treasury and Finance Minister Nureddin Nebati said this month that the issue of inflation had been “resolved.” Price increases in December decelerated at the steepest pace in more than a quarter century, bringing the annual rate to 64% from above 80% in the previous months. 

–With assistance from Joel Rinneby.

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