Turkish Central Bank Leaves Interest Rates at Already Elevated Levels

April 26, 2017

The Central Bank of Turkey’s overnight lending rate had previously been raised by 25 basis points in late November and 75 basis points two months later to the current level of 9.25%. The one-week repo rate was also lifted back in November by 50 basis points to its present level of 8.0%, while the overnight borrowing rate has all this time stayed at 7.25%.

A released statement following the latest monetary policy review talks about a deterioration of Turkey’s inflation outlook. Consumer prices posted a double-digit 11.3% advance in the 12 months to March and promises to maintain a tight policy stance “until inflation outlook displays a significant improvement.” However, the statement attributes higher inflation to “cost push pressures and the volatility in food prices in recent months.” This euphemistic depiction skirts the root homegrown nature of Turkey’s inflation. Turkish lawmakers recently approved President Erdogan’s request of for sweeping additional powers that will likely enable the country’s trend away from democracy and toward authoritarian rule. This process is driving a wedge between Turkey and the rest of the European Union and diverting the nation’s foreign policy from pro-West toward a pro-Russian influence. Not surprisingly, the Turkish lira has been hammered and shows a 23% year-on-year loss against the dollar that is driving up import costs.

The statement warns that “if needed, further monetary tightening will be delivered,” but one has to think that given the centralization of political power in Turkey, it seems unlikely that the central bank will be able to chart a genuinely independent course that allows the policy stance to really remain ahead of the inflationary curve to an adequate degree. Doing so would impose too much drag on economic growth. Not only double-digit inflation but also a Turkish current account deficit of around 4.5% of GDP may prevent the lira from stabilizing in an enduring manner.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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