Turkish central bank hints at lower interest rates, investors say

The Central Bank of the Republic of Turkey (CBRT) has hinted that it is approaching an interest rate cut and its governor has not reiterated its past pledges to maintain a strict policy on the inflation during a conference call Wednesday, several investors who participated in the call mentioned.

Åžahap KavcıoÄŸlu did not mention the two promises made in previous calls and policy statements – that the policy rate would stay above inflation and that a strict policy would be maintained decisively – investors were cited by Reuters.

Eight foreign and local investors said they interpreted the comments as a change that could pave the way for a rapid cut in Turkey’s 19% key rate, which is only slightly above the inflation rate.

In recent weeks, analysts had expected easing to begin towards the end of the year.

“They definitely changed the language; they dropped that promise. They expect a significant drop (in inflation), “said a foreign investor who was on one of the two calls, adding that” there was no more explicit promise “to keep rates at. above inflation.

When asked about it, the CBRT “refused to confirm or deny it,” said the source, who requested anonymity.

Consumer prices edged up to nearly 19% in July, the highest level in more than two years, keeping pressure on the CBRT to maintain a firm position.

Friday’s data should show that annual inflation in August has remained close to July’s 18.95%.

Analysts are less confident than the CBRT that inflation will subside in the coming months, and some say rate hikes are needed. Still, most expect a reduction in the fourth quarter.

“No more rate hikes are coming,” another foreign investor said on the call.

The next political meeting is due to take place on September 23.

Inflation relief

Kavcıoğlu said the policy stance will ensure a drop in inflation starting in the fourth quarter, investors said during the calls.

The monetary authority had previously committed to keeping rates above inflation. It raised its year-end inflation forecast to 14.1% last month.

The CBRT said inflation would follow a volatile course in the short term due to both supply and demand factors, and that it would monitor the impact of volatility on its monetary position.

He also said that other major central banks allow headline inflation to far exceed their policy rates, as monetary policy alone cannot resolve the price pressures associated with the pandemic.

Nilüfer Sezgin, deputy general manager of Iş Portföy in Istanbul, said the CBRT pointed out that some measures of core inflation are lower than others, especially given the high prices of food and other commodities. .

“We can expect basic indicators such as non-food prices to weigh more heavily on CBRT policy decisions. This could push the rate cut forward, ”she said.

Kavcıoğlu also said there was no need for credit growth to slow further after the recent drop, and that the CBRT was working on possible additional measures to tackle consumer lending, five sources said.

In addition, the governor told investors that the performance of the country’s vaccination campaign had a positive impact on economic activity, employment and the current account balance.

He said early data indicated that domestic economic activity, supported by external demand, followed a solid path in the third quarter.

His remarks came after data released on Wednesday showed Turkey’s economy experienced massive 21.7% year-on-year growth in the second quarter, rebounding powerfully from a sharp slowdown a year earlier driven by restrictions linked to the COVID-19.

The governor said that the current upward trend in exports, the recovery of the tourism industry and the notable drop in gold imports have supported the continued improvement in the external balance.

“We expect the current account to register a surplus for the remainder of the year,” KavcıoÄŸlu noted.

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