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Dec 13 2018

Turkish bank more dovish, meaning rate cut risks remain – Nomura

Turkey’s central bank may have kept rates on hold on Thursday, but an accompanying statement was softer in tone, meaning risks of looser monetary policy persist, investment bank Nomura said.

The monetary policy committee omitted the word “decisively” when it said that “if needed, further tightening will be delivered”, Nomura economist Inan Demir said in e-mailed comments to clients.

The central bank has elected to keep rates steady at 24 percent after a 625 basis-point increase in September, which it said was necessary to tackle inflation. Turkey’s consumer price inflation slowed to 22.6 percent in November from a 15-year high of 25.2 percent in October, raising speculation that it might cut its benchmark rate and spark another sell-off in the lira.

“Our sense is that, ahead of the announcement, there were some lingering concerns about a premature rate cut,” Demir said. “This did not happen today; however, the partial but unmistakable softening of the rhetoric should keep those concerns alive for coming MPC meetings.”

The central bank has come under increased pressure this year from the government to keep rates low as economic activity slowed. A currency crisis, which peaked in August, has pushed up inflation and interest rates on bank loans, meaning consumers and businesses have less money to spend.

Demir said that the central bank should keep rates on hold until the third quarter of next year to await a more sustained improvement in the inflation outlook.

In contrast, while the central bank said on Thursday that it still sees risks to price stability, it did not characterise them as significant, unlike the statement it made at the monthly meeting in October.

The lira initially rallied about 1 percent after Thursday’s decision, but later pared those gains to trade up 0.1 percent at 5.33 per dollar at 8:32 p.m. in Istanbul. The currency has lost almost a third of its value this year, though is stronger than the record low of 7.22 per dollar it reached in August.