(Bloomberg) -- Turkey’s central bank will have to choose its words carefully as it charts its course back toward interest-rate cuts.
With annual inflation just below 20 percent and the lira under pressure again, a reduction is unlikely to be on the table when the Monetary Policy Committee gathers on Wednesday for the last meeting before local elections. Instead, the market is focused on two hawkish sentences that have remained unchanged in the statements that accompanied the past couple of decisions to hold rates.
“Any change in these sentences could make the market nervous,” said Yarkin Cebeci, an economist at JPMorgan Chase & Co (NYSE:JPM)., who expects the rhetoric to stay the same. “We believe any reference to easing could hurt credibility.”
The unease has played out in the market, with investors anticipating the Turkish currency will remain among the world’s most unstable. The gauge of expected price swings over a one-month period as implied by options extended a surge to more 300 basis points on Monday, before trimming its advance a day later. The cost of insuring against a default in Turkish government debt climbed for a fourth day to 313 basis points.
No longer hounded by President Recep Tayyip Erdogan, who’s previously insisted that high borrowing costs cause inflation, the central bank has zeroed in on price stability, increasing rates by 625 basis points last September to halt a plunge in the currency. Facing bellwether municipal elections in less than four weeks, the government has resorted to battling price pressures directly, cracking down on hoarding, cracking down on hoarding and selling discounted food.
After the March 31 vote, Turkey isn’t scheduled to hold another ballot for the next four years.
Economists now predict the central bank won’t resume rate cuts before the next quarter and will deliver 4.75 percentage points of monetary easing by the end of the year. The benchmark rate will be kept at 24 percent for a fourth straight meeting on Wednesday, according to all 25 analysts surveyed by Bloomberg.
Governor Murat Cetinkaya is waiting for what he’s called a “convincing” deceleration in price growth before resuming monetary easing. Headline inflation in February slowed to an annual 19.7 percent from 20.4 percent in the previous month.
Before last month’s decision to lower the amount of cash lenders are required to hold in reserves, Cetinkaya said any steps to free up liquidity wouldn’t necessarily mark a shift in monetary policy.
The question is how long Erdogan will give the central bank free rein.
The economy is sinking into its first recession in a decade as Turkish companies endure higher borrowing costs and loan growth remains sluggish. The lira is another concern. It’s depreciated against the dollar for four straight weeks, losing about 3 percent in one of the worst performances in emerging markets.
Policy makers should wait at least until June to start a “gradual easing cycle,” according to economists at Turkiye Garanti Bankasi AS.
“High levels of trend inflation and sticky inflation expectations should still be the main concern for Turkey’s central bank,” analysts led by Adem Ileri said in an emailed report.
(A previous version of this story corrected an economist’s name in final paragraph.)
(Updates with markets in fourth paragraph.)
