Geopolitical Game Changer for Turkey Sets Stage for Rate Pause

(Bloomberg) -- Geopolitical storm clouds are no longer gathering over Turkey’s monetary policy.

The lira has stabilized and pressure to continue with interest-rate increases has eased since this month’s release of an American pastor facing charges of espionage defused a diplomatic standoff with the U.S. The Monetary Policy Committee will keep its benchmark unchanged at 24 percent on Thursday, according to all but four of 29 economists in a Bloomberg survey.

The dilemma now is that inflation remains nearly five times the central bank’s official target of 5 percent, with a surge in producer prices signaling little relief ahead. But as a counterpoint, key indicators from consumer confidence to industrial production are pointing to a rapid slowdown in the economy. That will eventually curb some of the cost pressures, especially after policy makers last month delivered their biggest rate hike since at least 2002.

“In recent weeks, the negative sentiment towards Turkey has eased, which is reflected in a turnaround of the dollar-lira pair,” said Nora Neuteboom, an economist at ABN Amro NV in Amsterdam. And given the “deflationary developments, the central bank may want to wait and see what are the lagged effects of their bold action on September 13.”

The spike in consumer inflation is largely due to a meltdown in the lira, which lost more than a quarter of its value in August partly due to the diplomatic spat with the U.S. Annual price growth accelerated to nearly 25 percent last month and may climb to over 30 percent in the months ahead, according to UniCredit SpA.

“The central bank may want to monitor price stability closely in the coming two months and, if it deviates from the baseline scenario, take action in December,” Neuteboom said.

The depreciation has also ravaged the economy and exposed the vulnerability of companies saddled with dollar debt. The International Monetary Fund now expects barely any growth next year while economists surveyed by Bloomberg see an expansion of 1 percent.

The worsening price outlook has left Piotr Matys of Rabobank expecting further tightening.

“Another rate hike cannot be excluded,” said Matys, who predicts an increase of 150 basis points.

©2018 Bloomberg L.P.