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Turkey’s central bank holds rates, urges patience on inflation

Published: Updated:

Turkey’s central bank kept its policy rate unchanged at 19 percent on Wednesday and said inflation could be volatile through the summer after it unexpectedly rose to 17.5 percent, though it gave no clear indication that expected easing was imminent.

The bank last changed its one-week policy rate in March when former governor Naci Agbal raised it to head off inflation, which has risen since last September and has been double digits for most of the past four years.

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A Reuters poll shows analysts expect rate cuts to begin in the fourth quarter when price rises should ease a bit. But estimates of the size of the cuts have narrowed in recent months as price pressures remained.

The weak lira, down some 14 percent this year after touching an all-time low in June, raises inflation via Turkey’s heavy imports, while a coronavirus lockdown re-opening in the last two months has revived demand.

“Possible volatility in inflation during the summer due to the reopening and high levels of inflation expectations continue to pose risks to the pricing behavior and inflation outlook,” the bank’s policy committee said.

It repeated a mostly hawkish stance, including a pledge to keep the key rate above inflation until indicators point to a permanent fall in medium-term readings.

The currency was unchanged after the decision.

Inflation jumped in June to 17.53 percent mainly due to imports, energy prices and the lira, after it fell unexpectedly in May when there was a partial coronavirus lockdown.

Turkey targets 5 percent inflation and the bank forecasts 12.2 percent by year end, lower than most analysts.

Central Bank Governor Sahap Kavcioglu, who President Tayyip Erdogan appointed in March in a shock to markets, has said inflation should fall around September.

Erdogan, a self-described enemy of interest rates, has pointed to July or August for possible cuts. That prompted analysts to warn about premature easing that could hurt the lira and economy.

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