Turkey Holds Rates as Oil Price Spike Tests Inflation Fight

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(Bloomberg) — Turkey’s central bank left interest rates unchanged on Thursday, with the war in the Middle East and rising energy prices threatening to derail a fragile disinflation process.

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The Monetary Policy Committee, led by Governor Fatih Karahan, kept the one-week repo rate at 37% for a fourth straight meeting, matching the forecast of all 20 analysts surveyed by Bloomberg.

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It also held the overnight rate — the effective lending rate since the outbreak of the Iran war in late February — at 40%.

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The lira was little changed after the decision, trading less than 0.1% lower at 47.23 against the US dollar. The Borsa Istanbul Banks Index was down 0.8%.

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The decision comes as Brent crude has surged past $98 a barrel since the start of the month, in response to increased fighting in the Middle East. Inflationary pressures for Turkey, a major energy importer, are tied to such price fluctuations.

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“Leading indicators suggest that the underlying trend will rise temporarily in July,” the MPC said in a statement accompanying the decision. “As a result of the growing uncertainty amid geopolitical developments, energy prices started trending up again.”

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Turkish inflation eased about half a percentage point to 32.1% in June, the first slowdown since the start of the conflict.

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What Bloomberg Economics Says…

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“We forecast the central bank to maintain the policy rate at 37% through year-end given the elevated inflation outlook. We see a very gradual disinflation process this year, with annual inflation easing to 29.5% by December. We expect underlying inflation pressures to remain elevated while domestic demand continues to add to price pressures. That backs our view of slow disinflation relative to the central bank’s own 26% year-end forecast published in May.”

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— Selva Bahar Baziki, economist. Click here to read more.

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Bloomberg reported earlier that Karahan told a group of investors that policymakers wanted to assess July inflation data and geopolitical developments before shifting the rates path.

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“We do not expect the central bank to materially lower the effective funding cost before autumn,” said Tufan Comert, executive director of global markets strategy at BBVA. “While the statement keeps the door open for further tightening should inflation expectations deteriorate, it also reinforces our view that, provided external risks recede and the disinflation trend resumes after the July uptick, the next move in policy is still likely to be an easing rather than a hike.”

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Before the war, the central bank had been unwinding one of the most aggressive tightening cycles among major emerging markets, incrementally lowering the policy rate from 50% last year as inflation cooled from its peak. The war brought the easing to a halt.

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Despite not instituting an official hike, the monetary authority effectively tightened policy in March when it suspended its one-week repo auctions and began funding through the more expensive overnight rate.

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Economists recently surveyed by the central bank see inflation slowing to just under 30% by year-end, leaving little room for rate cuts this year.

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—With assistance from Tugce Ozsoy.

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(Updates with economist comments.)

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