Turkey Hardens Tone on Rate Hold, Reducing Chance of Cut in 2024

Turkey’s central bank extended its interest-rate pause for a seventh month and adopted a more hard-line stance on the course of inflation, pushing back expectations for a rate cut into next year. 

The Monetary Policy Committee under Governor Fatih Karahan kept the one-week repo rate at 50%, in line with almost all forecasts in a Bloomberg survey. The policymakers had appeared to soften their position last month, prompting analysts to believe a rate cut could be imminent, but Thursday’s statement reversed the course.

The bank has concerns about “uncertainty regarding the pace of improvement in inflation,” according to a statement accompanying the decision. In September, the MPC made more encouraging noises about recent data. It maintained its forecast of an improvement in services inflation in the final quarter of the year.

Drop in inflation 

“A much more hawkish hold than I expected — I was looking for a November cut but this may be pushed back,” said Win Thin, global head of markets strategy at Brown Brothers Harriman. “It will depend on the inflation data.” 

Worse-than-anticipated September inflation saw many economists revise forecasts for a rate cut to January, and Thursday’s statement appeared to reaffirm that belief. Annual inflation slowed to slightly under 50% in September.

“Unless we see an unexpected drop in inflation, we anticipate that the earliest timeline for a rate reduction is January,” said Onur Ilgen, head of treasury at MUFG Bank Turkey in Istanbul. “The lira is likely to maintain its stable course in the coming weeks with the cautious stance shown by the central bank.”

Maya Senussi of Oxford Economics similarly said the statement “strengthens our conviction that the central bank will not cut rates until” the first quarter of 2025.

The yield on Turkey’s 10-year government bonds reversed an earlier decline, rising four basis points to 29.61% as of 2:37 p.m. in Istanbul. The yield on two-year government notes trimmed their decline to five basis points to 42.86%. Turkey’s Borsa Istanbul Banks Index extended a drop to as much as 0.8%, before trading 0.5% lower. The Turkish lira was little changed.

The central bank looks at two main criteria when considering whether Turkey is ready for rate cuts: a sustained deceleration in monthly price growth and improved inflation expectations, especially among businesses. Karahan said earlier this month there’s “some distance to go” in both criteria, with September’s monthly price gains higher than officials had forecast. 

A slowdown in headline prices

The central bank’s favored gauge of seasonally-adjusted monthly inflation has been stuck around 3% despite a slowdown in headline prices. Deputy Governor Cevdet Akcay told the Economist last week that the bank would “stay tight until the underlying trend of monthly inflation comes down to a sustainable basis.” 

Turkish President Recep Tayyip Erdogan approved a revamp of economic policy last year, but investors can’t shake off concerns on how long he will allow rates to stay this high given his history of favoring a growth-at-all-costs strategy. 

Underlying pressures warrant keeping rates at 50% throughout the rest of the year, Erik Meyersson of SEB AB said ahead of Thursday’s decision, seeing slow progress on inflation. Still, a rate cut could come before the end of 2024 over “implicit political pressures,” he said.

Governor Karahan is due to present the year’s final quarterly inflation report on Nov. 8, where he’ll also take questions from reporters and economists.