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Turkey Holds Benchmark Policy Rate as Inflation Accelerates

EconomyAug 12, 2021 07:27AM ET
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© Reuters. Turkey Holds Benchmark Policy Rate as Inflation Accelerates

(Bloomberg) -- Turkey’s central bank held its benchmark interest rate for a fifth month on Thursday, with accelerating inflation leaving little room for a reduction in borrowing costs sought by President Recep Tayyip Erdogan.

The Monetary Policy Committee held its one-week repo rate at 19% as forecast by all 20 analysts surveyed by Bloomberg.

The bank maintained its pledge to keep the rate above inflation, setting Governor Sahap Kavcioglu on a possible collision course with the president, who holds the unorthodox view that higher interest rates exacerbate inflation and has also encouraged lower borrowing costs as a means to fuel growth.

“The policy rate will continue to be determined at a level above inflation to maintain a strong disinflationary effect until strong indicators point to a permanent fall in inflation and the medium-term 5% target is reached,” the bank said.

Kavcioglu’s forward guidance has tied his hands in recent months as consumer price gains have gotten dangerously close to his policy rate. Inflation reached 18.95% in July.

For Kavcioglu to deliver the cut sought by Erdogan, he would either have to contradict his earlier pledges or wait for price gains to cool.

The lira extended gains after the statement and was trading 0.9% higher at 8.5609 per dollar at 2:05 p.m. in Istanbul.

The currency has depreciated around 16% since Kavcioglu’s appointment to the top job at the monetary authority, compounding the rise in consumer prices. Inflation accelerated during nine of the past 10 months, driven by a weak lira, rising commodity prices and a drought that badly affected harvests.

Economist Outlook

“We expect consumer inflation to remain elevated at 19%,” Deutsche Bank economist Fatih Akcelik said in an emailed report before the rates decision. Deutsche Bank (DE:DBKGn) is forecasting that the central bank will begin its next easing cycle with a 50-basis-point cut in October followed by another in November.

©2021 Bloomberg L.P.


Turkey Holds Benchmark Policy Rate as Inflation Accelerates

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