No recovery for Turkish economy as interest rates expected to remain at 50% – BNN Bloomberg

(Bloomberg) — Turkey's central bank is likely to keep its benchmark interest rate unchanged for the fifth straight month, as the focus shifts to liquidity management and visible signs of a slowdown in economic growth.

The monetary policy committee headed by Governor Fatih Karahan is expected to keep the one-week repo rate at 50%, according to a Bloomberg survey of economists. Policy must remain tight for now, officials say, to meet their inflation target of 38% by year-end (currently 62%).

Officials will announce their policy decision on Tuesday.

Economists say the central bank will focus on complementary measures to tighten monetary policy, such as managing liquidity conditions while keeping interest rates unchanged. The oversupply of the lira, driven by a high policy rate and resurgent foreign interest in Turkish assets, remains a concern because it could lead to lower deposit rates and undermine tight monetary policy.

Officials have taken a variety of measures to neutralize excess liquidity, including lending through the central clearing house and lira auctions. Karahan stressed in a presentation earlier this month that the bank would diversify its tools to deal with the oversupply.

“The abundance of lira in the market has led to the central bank being a net borrower at times since mid-2023 and continuously since July 12,” said Selva Bahar Baziki of Bloomberg Economics. She expects the monetary authority “to respond to unfavorable inflation reports with further tightening using alternative tools.”

Annual inflation fell sharply last month, largely due to base effect comparisons with the previous year. Monthly inflation, the central bank's preferred indicator, has been volatile, however. Officials want to see a sustained decline here before discussing rate cuts.

Inflation expectations among businesses and households, another key gauge for the central bank, are also above officials' forecasts. Raised expectations affect pricing and demand, and the central bank believes it is essential to rein them in. The central bank has said that while domestic demand is easing, it remains at “inflationary” levels, while inflation in the services sector remains sluggish.

Q&A: Turkish central bank chief talks about forecasts and inflation

Preliminary data suggest the slowdown is likely to become more pronounced in the second half of the year. The central bank said it was already observing a decline in voluntary spending.

The slowdown is also evident in economic activity. An indicator of Turkish manufacturing activity has been below 50 – the threshold that separates growth from contraction – for the past four months. Weekday-adjusted industrial production fell 4.7% year-on-year – the sharpest decline since the deadly earthquakes in February 2023. Unemployment posted its sharpest monthly increase in three years, and that rate could rise even further, according to economists at Garanti BBVA Research.

“We observe a more pronounced slowdown in aggregate demand towards the end of the second quarter and expect that tighter monetary policy and financing conditions will facilitate a deeper correction in the third quarter,” said Garanti economists, including Ali Batuhan Barlas. “The extent of the expected fiscal consolidation and the duration of the tight monetary policy will be crucial for the growth outlook.”

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