Turkey's Central Bank leaves key rate unchanged at 9 percent once again

Reuters - Duvar English

Turkey's central bank held interest rates at 9% for a second straight month on Jan. 19, and analysts said it could return to easing in the run-up to May elections given inflation is expected to drift lower from 64% last month.

The central bank said the inflation level and trend have improved due to a broad state strategy of boosting lira use. Relatively stronger domestic demand offset the recent economic slowdown due to weaker foreign demand, it added.

President Recep Tayyip Erdoğan faces tight elections in four months in which the cost-of-living crisis is a top concern. He could soon urge more rate cuts as part of his unorthodox stance that policy easing also lowers prices, analysts said.

A previous easing cycle in 2021 sparked a currency crash that stoked the wave of inflation that peaked at a 24-year high above 85% in October. It came down to 64.3% in December, largely due to a favourable base effect.

The bank had cut by 500 basis points in the four months to November, citing an economic slowdown, even as central banks around the world raced in the other direction.

Haluk Burumcekci, founder of Burumcekci Consulting, said changes in the bank's policy statement compared with previous months "shows that the door has been reopened for additional interest rate cuts."

The central bank expects inflation to fall to 22.3% by the end of 2023.

"It is critically important that financial conditions remain supportive" of the momentum in industrial production, the bank's policy committee said.

For December, the government-run Turkish Statistical Institute (TÜİK) reported an annual inflation rate of 64.27, whereas the independent inflation group ENAG put the figure at 137.55%.

Erdoğan's economic programme has prioritised rate cuts to boost production, employment and investment with the aim of flipping Turkey's chronic current account deficits to a surplus.

The central bank aims to raise the share of lira deposits in the banking system to 60% in the first half of the year, from some 53% at end-2022, to help stabilise inflation.

It said on Jan. 19 its entire policy set, particularly funding channels, would be aligned with so-called liraization targets.

The lira shed 44% versus the dollar in 2021 and 30% in 2022. But it has stabilised since August and is less reactive to policy decisions due to a scheme that protects deposits against depreciation, Ankara's indirect forex sales to the market, and the state's heavy hand in directing credit in the economy.

The currency was unmoved on Jan. 19.

Liam Peach, senior emerging markets economist at Capital Economics, said currency-stabilizing policies may not prove sustainable.

"The longer interest rates remain so low and the currency remains so stable, the greater the risk that a bigger adjustment will be needed in the future," he said.

He said Erdoğan could "put pressure on the CBRT to loosen policy ahead of this year's election" given dropping inflation and slowing growth.

Economists say the unorthodox policies will continue at least until elections expected to be held on May 14.

The political opposition has promised to return to orthodox policies and free the central bank to raise rates, if they are able to win against Erdogan in what is seen as the biggest challenge to his 20-year rule.

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