Türkiye will turn to rate cuts after keeping interest rates unchanged again

(Bloomberg) — Turkey’s central bank is likely to keep its key interest rate unchanged for an eighth straight month this week, although policymakers may signal an easing cycle could begin as early as December.

The Monetary Policy Committee will keep the one-week repo rate unchanged at 50% on Thursday, according to all economists surveyed by Bloomberg. However, policymakers are expected to soften their language in a statement accompanying the decision, suggesting a rate cut may be imminent.

The policy outlook has become murky in recent months as inflation data for September and October came in higher than expected. After the data was released, many analysts pushed forward their forecasts for a rate cut to next year, having previously made the forecast in November.

But while central bank governor Fatih Callahan appeared committed to keeping interest rates high at the last policy meeting, he struck a different tone earlier this month while raising his inflation forecast for this year and beyond.

Analysts at Deutsche Bank including Ankit Jain said the changes signaled a “slightly less hawkish monetary policy stance”. The bank had forecast a rate cut in January before changing its forecast to next month.

The last MPC meeting of the year is scheduled for December 26.

Meanwhile, economists at Goldman Sachs Group Inc. and Morgan Stanley still believe the first rate cut will only come in January.

Annual inflation fell to 48.6% in October, and the central bank expects the level to fall to 44% by the end of the year. However, policymakers preferred to focus on seasonally adjusted monthly prices, which Bloomberg Economics deemed “significantly lower” in November. Selva Bahar Baziki, Bloomberg’s Turkish economist, said that could pave the way for cuts starting in December.

With interest rates as high as 50%, businesses are becoming increasingly impatient. Influential lobby group Musiad joined calls for a rate cut earlier this week, saying there should be a “symbolic” cut next month and complaining that operating costs were too expensive.

Turkish President Recep Tayyip Erdogan, known for his aversion to high borrowing costs, also addressed monetary policy after months of silence, with a somewhat cryptic message: “Inflation and Borrowing costs will fall.”

Erdogan has in the past pushed central bankers to lower interest rates, regardless of inflation, to spur economic growth and removed those who failed to comply.

As the debate over raising the minimum wage next year looms, there is increasing focus on complementary fiscal measures to help reduce inflation. Callaghan said price increases in some industries stem from factors that have little control over monetary policy.

Finance Minister Mohammad Simsek acknowledged that additional fiscal measures must be taken.

Next year’s minimum wage increase, likely to be announced in December, will be key. Economists at Deutsche Bank said investors would consider an appropriate rise to be about 25%, but would be shocked if it rose more than 30%.

On Wednesday, Erdogan pledged that wage growth would continue to outpace inflation next year and workers’ purchasing power would be safeguarded.

—With help from Joel Linneby.

(Update on President Erdogan’s comments on raising minimum wage.)

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