- Economists are almost evenly split over next central bank move
- Policymakers said current rates were ‘adequate’ after last cut
According to Bloomberg article published on March 23, 2023, economists are divided over whether Türkiye’s central bank will pause on Thursday or surprise with a cut even after signaling that interest rates are probably low enough.
The latest guidance from the central bank in February telegraphed that rates were at an “adequate” level following a half-a-percentage decrease in the benchmark to 8.5%. And unlike previous months, President Recep Tayyip Erdogan has kept mum on his preference ahead of this week’s decision.
But the central bank’s erratic track record of policymaking — alongside looming elections and the fallout from disastrous earthquakes — has put a question mark around what comes next.
The uncertainty has left economists almost evenly split in predicting the central bank’s move. HSBC Holdings Plc, Goldman Sachs Group Inc. and UniCredit SpA are among those expecting a cut to 8%. A slight majority that includes Citigroup Inc. and Barclays Plc sees no change, according to a Bloomberg survey.
As the hit to economic activity from the quakes “becomes clearer, the authorities will likely want to further signal the expansionary direction of policy,” Goldman economists including Clemens Grafe said in a report. “In the past they have added the same guidance sentence and proceeded to cut in any case at the next meeting.”
The choice for Governor Sahap Kavcioglu might come down to an assessment of risks to the lira and the economy, especially as imbalances in trade and the budget grow worse. The Turkish Treasury and Finance Ministry has said the quakes that killed over 50,000 people in the country will exact an economic toll estimated at about $104 billion.
What Bloomberg Economics Says...
“The central bank will probably rely on alternative tools, such as securities maintenance rules and banking regulation to ensure cheap credit flow especially to disaster-struck areas and to counter the downdraft on the currency from its loose stance.” Selva Bahar Baziki, economist.
Guided by an unconventional belief that lower rates can bring down inflation, Erdogan has been focused on boosting the economy with cheap loans ahead of the election in May. A cut in the benchmark to 8% would bring it to the lowest level since 2018, even as price growth remains above an annual 55%.
The urgency is only increasing for Erdogan as his ruling alliance risks losing momentum against the opposition. In the latest attempt to fire up economic growth, Türkiye’s sovereign wealth fund stepped up plans for a capital injection into state lenders.
But the efforts so far are yielding mixed results. With the lira under pressure, the central bank has made it difficult for firms to access cheap loans for fear they will use the funds to purchase foreign exchange.
And the cost of money is largely on the rise across the economy, with the weighted average rate for commercial loans surging this month to 16.2% for its biggest weekly increase in more than a year. The cost of consumer credit has been well over 20%.
The upshot for markets is that the lira is probably already too exposed to bear another rate cut. Global policymakers also remain hawkish despite a sudden banking crisis, creating a risk for Türkiye because its official borrowing costs are already among the world’s lowest when adjusted for inflation.
Lira forward contracts are showing that traders expect a decline in the currency after the election, regardless of who wins.
Without recourse to higher rates, the central bank has tried to keep the currency stable in part through back-door interventions and measures that require exporters to surrender some of their foreign-exchange income.
Another reason for the central bank to hold off from monetary easing is that its reserves have additionally come under strain from having to finance the bulk of Türkiye’s current-account deficit, which reached a record of almost $10 billion in January.
“The ongoing pressure on gross reserves since the start of the year amid a stable lira does not provide much space for accommodative financial conditions,” Morgan Stanley economists including Alina Slyusarchuk said in a report.
