Turkish Central Bank Drops Hawkish Stance

turkylira aug13 25apr19

Turkey's central bank kept its key interest rate unchanged for a fifth consecutive session in Thursday and omitted its hawkish stance from the forward guidance, sending the lira further lower.

The Monetary Policy Committee, led by Governor Murat Cetinkaya, decided to keep the policy rate unchanged at 24 percent, the TCMB said in a statement. The decision was in line with economists' expectations.

The previous change in the rate was a massive hike in September. The rate was raised from 17.75 percent to 24 percent, despite strong pressure from the government for a rate cut.

The central bank reiterated that it will continue to use all available instruments in pursuit of the price stability objective.

"Factors affecting inflation will be closely monitored and monetary stance will be determined to keep inflation in line with the targeted path," the bank said.

Signaling a dovish shift, which took economists by surprise given the weaker lira, the bank dropped its earlier pledge that "further monetary tightening will be delivered" from its forward guidance.

The lira weakened nearly 1 percent since the decision announcement.

"While Turkey's current account position has improved markedly since last year's currency crisis, the country's large external debts mean that the lira is still one of the most vulnerable EM currencies to bouts of investor risk aversion," Capital Economics economist Jason Tuvey said.

Weaker-than-expected global growth can lead to a deterioration in risk sentiment and there is the threat of renewed political turmoil due to disputed local election results in Istanbul and tensions with the US, the economist pointed out.

"In this environment, the central bank's scope to cut interest rates is likely to be more limited than most anticipate," Tuvey said.

The economist said any periodic bouts of monetary tightening due to sell-offs in the lira are likely to prompt the bank to the use of the corridor again, in order to avoid the wrath of President Recep Tayyip Erdogan.

Citing recently released data, the bank said the rebalancing trend in the economy has continued. External demand maintains its relative strength and the current account balance is expected to maintain its improving trend.

Meanwhile, economic activity displays a slow pace, partly due to tight financial conditions, the bank said.

Inflation indicators are showing some improvement, thanks to developments in domestic demand, but higher food and import prices and rising inflation expectations suggest continued risks to price stability, the TCMB said.

"Accordingly, the Committee has decided to maintain the tight monetary policy stance until inflation outlook displays a significant improvement," the bank said.

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