(Bloomberg) -- Turkey’s central bank kept its benchmark interest rate unchanged for a second meeting on Thursday after forecasting that inflation had reached its peak.
The Monetary Policy Committee left its key rate at 19% as forecast by all analysts in a Bloomberg survey. Inflation accelerated for a seventh month in April, spurred on by a weak lira and rising global energy prices. But new bank Governor Sahap Kavcioglu predicted the pace of price gains would start dropping to 12.2% by the end of 2021.
Inflation’s upward march has left Turkey’s real rates -- the difference between its inflation and policy rates -- at less than 2%. That means Kavcioglu has little room to pursue the lower borrowing costs sought by President Recep Tayyip Erdogan, who holds the unorthodox view that higher interest rates spur rather than curb prices.
Cutting now would have risked further turbulence for the lira which anyway has weakened more than 13% against the dollar since the governor took over at the bank on March 20. Kavcioglu has pledged to offer a positive real rate when adjusted for realized and expected inflation and maintain tight policy until the bank’s 5% inflation target is achieved.
Barclays economist Ercan Erguzel contested the central bank’s inflation forecasting, saying the upswing in April “is probably not a peak.” He doesn’t expect an interest-rate cut before the last quarter as inflation remains around 17% until October. Still, the central bank’s more optimistic inflation forecast path suggests it “could consider lowering rates in August or September,” he said before the decision.
Kavcioglu is Turkey’s fourth central bank chief since 2018, with his predecessor sacked by Erdogan after overseeing a 200-basis-point hike in the benchmark. He left interest rates unchanged in his first monetary policy meeting but removed a pledge to deliver additional tightening.
The rate-setting committee is scheduled to meet next in six weeks. May inflation data will be published June 3.
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