Turkey central bank holds rates at 50%

Turkey’s central bank kept interest rates unchanged at 50% on Thursday for the second month in a row, as expected.

The Bank said in a statement: "The effects of monetary tightening on credit conditions and domestic demand are closely monitored. Considering the lagged effects of the monetary tightening, the Committee decided to keep the policy rate unchanged, but reiterated that it remains highly attentive to inflation risks.

"The tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range. Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen.

"The decisiveness regarding tight monetary stance will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations. Consequently, disinflation will be established in the second half of the year."

Liam Peach, senior emerging markets economist at Capital Economics, said that while the consensus view is for rates to be cut by the end of this year, he still doesn’t expect an easing cycle to start until early 2025.

"The outcome of today’s meeting was expected by all analysts. It follows a hold in April and a 500 basis points rate hike in March. Inflation rose sharply at the start of the year but the figures for April provided encouraging signs that price pressures are softening."

Peach said inflation is likely to reach a peak at around 75% year-on-year in May and the central bank is confident that it will end the year at 38%.

"Achieving this will require a fairly sharp slowdown in monthly price inflation over the coming months and an extended pause in interest rates is likely while this process takes hold," he said.

"Interest rate cuts are still some way off in our view, particularly given the strength of economic activity so far this year and the upside risks to the inflation outlook. Many analysts expect a rate cut in Q4, but we still think the central bank will wait until next year."