Turkish central bank says to stay cautious until inflation improves

Inflation topped 8 percent for the first time this year in May

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Turkey’s central bank said on Wednesday it would not consider a shift in its cautious monetary policy until it saw inflation easing significantly, signaling it would continue to keep rates on hold in the near future.

In a presentation released on its website a day after it kept rates on hold at a monthly policy-setting meeting, the bank maintained a dovish note on the short-term outlook for inflation. The policy has worried economists who see price pressure rising, thanks in part to chronic weakness in the lira.

“The cautious monetary policy stance will be maintained, by keeping a flat yield curve, until there is a significant improvement in the inflation outlook,” the bank said.

“Inflation is expected to decline in the short term owing to a partial correction in food prices.”

Inflation topped 8 percent for the first time this year in May, as the exchange rate put pressure on prices. Some economists say the bank needs to hike rates to prop up the lira and rein in price increase, but note that such a move is unlikely, given continued political pressure for a rate cut.

President Recep Tayyip Erdogan repeatedly called for lower rates in the months before the June 7 election, even going so far as to equate high rates with treason.

That unnerved investors, who fear political meddling in monetary policy, and put more pressure on the lira.

That call was renewed by Economy Minister Nihat Zeybekci on Monday.

“We think Turkey’s strong core inflation is driven by deep-seated structural problems. As a result, we expect inflation to rise, not fall, over the next year or so,” Capital Economics said in a note to clients following Tuesday’s policy decision.

“The (central bank’s) view on inflation probably reflects the fact that it continues to face political pressure.”

Turkish assets were little changed at 1123 GMT, with the lira currency flat and the BIST 100 share index 0.8 percent firmer.

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