(Bloomberg) -- Turkey may not get around to lowering interest rates until next quarter, delaying its return to monetary easing after weeks of political drama and currency upheaval followed the central bank’s last meeting.
With the lira notching the worst performance in emerging markets in April and tensions still high after a municipal ballot, policy makers will postpone cuts until after June, holding the benchmark one-week repurchase rate at 24 percent on Thursday, according to separate surveys of economists. Only a month ago, they predicted it would be lowered this quarter.
Despite swirling speculation around the health of Turkey’s international reserves and a mix of risks from geopolitics to oil, the central bank restarted one-week repo auctions this month, effectively reversing a surprise monetary tightening it used to steady the lira before the March 31 election. Price pressures abound as inflation still hovers at nearly four times the official target of 5 percent.
“There’s a strong case in favor of a hike rather than staying on hold, given the FX market stress since their last meeting,” said Inan Demir, an economist at Nomura International Plc in London. “However, my forecast is no change: the fact that the central bank reverted to funding the market from the 24 percent rate after a brief interval in late March to early April suggests to me that they are comfortable with the current level of the policy rate.”
Governor Murat Cetinkaya has pledged to wait for a “convincing” inflation slowdown before cutting rates, and has been stymied by the weaker lira. Investors have soured on Turkey’s currency as the central bank struggled to explain moves in its reserves, fueling concern about the state of the nation’s finances.
With speculation rife that the government was trying to prop up the currency, even a liquidity shortage in the swaps market before last month’s elections brought only short-lived relief.
The central bank “needs to do something to change the mood music around the lira,” said Tim Ash, senior strategist at BlueBay Asset Management LLP in London. “At the moment it just seems to want to move one way -- lower.”
The lira is down just over 5 percent so far this month against the dollar, extending its loss for the year to about 10 percent, second only to Argentina’s peso.
What Bloomberg’s Economists Say
“Even before March, a rate cut this month was a remote possibility. The central bank would now probably opt to explain what is happening to its reserves before spooking financial markets with a surprise rate cut.”
--Ziad Daoud, Mideast economistClick here to view the piece.
There might not be any clarity on the state of Turkish reserves until a quarterly inflation briefing on April 30, according to an official familiar with the central bank’s plans. If that’s the case, the focus on Thursday will be on Turkey’s commitment to higher borrowing costs. Policy makers have kept two hawkish sentences unchanged in the statements that accompanied their recent decisions to hold rates.
“The bank will remain cautious in signaling any rate cuts and in fact, we do not rule out more hawkish messages in its accompanying statement,” said Muhammet Mercan, chief economist at ING Bank AS. It “will likely maintain a tight stance in the post-election period and avoid any premature policy rate adjustment to maintain price stability and support financial stability.”