Turkey’s central bank on Thursday held its benchmark policy rate unchanged for the fifth consecutive month, in line with market expectations, in a move that comes amid expectations of a further rise in inflation.
The one-week repo rate was kept at 14%, where it has been since January when the Central Bank of the Republic of Turkey (CBRT) paused an easing cycle after its cuts totaling 500 basis points since September last year.
The bank defended its policy decision saying it expects disinflation to start, citing base effects and an expected resolution of an ongoing regional conflict, an apparent reference to Russia’s war in Ukraine, among other factors.
The bank said it would keep its policy rate “constant,” arguing inflation was driven by geopolitical developments and the “temporary effects of pricing formations.”
“The Committee expects disinflation process to start on the back of strengthened measures for sustainable price and financial stability,” the bank said in its statement following its monthly monetary policy committee meeting.
The Turkish lira was little changed after the rates decision, trading 0.2% weaker at 16.3800. The currency has declined 11% since the previous monetary policy meeting and is down some 19% this year, further raising prices due to Turkey’s heavy import bill.
Propelled by rising energy and commodity prices, Turkey’s annual inflation runs at a 20-year high of nearly 70% as of April, according to official data.
Consumer prices have been increasing despite tax cuts on basic goods and government subsidies for utility bills to ease the burden on household budgets.
“The increase in inflation is driven by rising energy costs resulting from geopolitical developments and temporary effects of pricing formations that are not supported by economic fundamentals,” the bank said.
War-related sanctions on Russia have meanwhile sent gas and oil prices soaring, lifting prices for import-dependent Turkey.
The decision on Thursday came in line with the expectations of most economists, who see the key interest rate remaining steady through year-end.
All 15 economists in a Reuters poll expected the bank to leave its benchmark rate unchanged this week.
The government says inflation will fall under its new economic program, which prioritizes low interest rates to boost production and exports with the goal of achieving a current account surplus.
The central bank late last month revised up its inflation forecasts for this year and the next, mainly because of the rise in commodity prices and supply issues.
It had forecast that annual inflation will peak at around 70% by June before declining to near 43% by year-end and falling to single digits by end-2024.
The bank’s closely-watched survey this week said expectations for inflation through the end of this year have ticked higher.
Year-end consumer price inflation is seen at nearly 58%, up from a forecast of 46.44% a month earlier, the survey of market participants showed.
Participants see the inflation rate at 33.28% a year from now, up from the 28.41% estimate in the previous survey, and at 17.68% in two years, from the previous forecast of 19.54%.
Treasury and Finance Minister Nureddin Nebati last week said expectations were one of the biggest factors to blame for the increase in inflation.
Calling for an all-out battle against soaring prices, Nebati stressed that the country would ensure that the rigidity in expectations is “broken.”
Longer-term inflation expectations are closely monitored by central banks as evidence of whether their policies are keeping inflation psychology at bay.
If expectations continue to rise, it would indicate a loss of confidence in the monetary authorities’ ability to control inflation – and make inflation itself harder to beat without painfully high and fast interest rate increases.