Turkish central bank holds interest rates for 9th month

The Central Bank of the Republic of Turkey has held interest rates at current levels for the ninth consecutive month, the bank said in a statement Tuesday.

The bank’s monetary policy committee left the one-week repo rate, which is the rate applied to one-week loans to banks, at 7.5 percent, and the overnight rate for banks at 10.75 percent.

The bank said that lower energy prices were favorable to the inflation outlook, but exchange-rate movements are pushing inflation higher, the statement said.

"Energy price developments affect inflation favorably, while cumulative exchange rate movements delay the improvement in the core indicators. Considering the impact of the uncertainty in global markets on inflation expectations and taking into account the volatility in energy and unprocessed food prices, the committee stated that tight liquidity stance will be maintained as long as deemed necessary," the statement said.

Any decision on a rate hike would depend on a change in the inflation outlook, the statement said.

 Fed rate hike awaited

Analysts said that the Turkish central bank awaits the expected rate hike from the U.S. Federal Reserve in December before taking any action.

"The Turkish central bank has limited possibilities for action before the Fed makes its move," commented Christopher Dembik, an economist with Saxo Banque in Paris.

"The bank will want to determine the effect of the Fed’s move, and then see what and how to react," he added.

"As we expect a December hike by the Fed, the first CBRT [Central Bank of the Republic of Turkey] move might come later, in the last month of 2015 or the first month of 2016,” Muhammet Mercan, an economist with ING bank in Istanbul, wrote in a note published on Nov. 23.

The bank has signaled that it awaits the Fed liftoff. Turkish economic growth is strong but the bank noted in its statement that Turkish economic growth is strong.

"The Turkish economy continues to grow at a strong rate relative to anemic global growth," Dembik said.

"We expect the Turkish economy to surprise on the up side," agreed Bora Tamer Yilmaz, an economist with Ziraat Securities in Istanbul. "This year the shift to domestic demand helped economic activity to gain at a healthy pace."

Domestic demand continues to be the main growth driver, according to Dembik.

Turkish consumer spending increased to 21,038,600 Turkish liras ($7.38 million) in the second quarter of 2015 from 21,011,000 Turkish liras ($7.37 million) in the first quarter, according to the Turkish Statistical Institute (TurkStat). Turkish consumers spent about $453.6 million in 2014, up from ($447.7) million in the previous year.

"With a stable government based on a single-party majority installed in Ankara, Turkish consumers may be expected to keep their purses open," Dembik said.

Mercan also suggested that consumer demand will stay strong in the near term. "In addition, consumer confidence, which dropped to its lowest level since the global crisis in September due to volatility in financial markets, geopolitical risks and domestic politics, exerting downward pressure on private consumption, recovered significantly in November," Mercan noted.

Consumer confidence rose 22.9 percent in November, according to the Turkish Statistical Institute.

One good indicator is that sales of white goods such as refrigerators and stoves have increased steadily in Turkey since 2013, according to the Turkish White Goods Association. Sales of these appliances rose to 20,302 in 2015 to date, from 18,653 for the entire year of 2014.

  Manufacturing improves

"Manufacturing activity is also picking up in Turkey," Yilmaz pointed out. "Manufacturers benefited from domestic demand for durable goods and automobiles. Currently, the run-rate of the economy -- the rate at which production capacity is used -- is at 3.4 percent, and after the general elections, growth may surprise to the up side," he said.

Recent readings of the Purchasing Managers’ Index have been close to 50 points, indicating that confidence is returning to companies in Turkey.

And exports are improving. While sales abroad have declined overall this year, there is a good chance that exports will pick up in the second half of the year, according to the central bank’s inflation report published on Oct. 28.

"Next year, we are expecting the euro area to further accelerate towards its trend growth rates on the back of ECB [European Central Bank] stimulus. Due to our sensitivity to Euro area, Turkey may have more favorable external demand conditions next year. On top of that, investments may pick up. We think that investment will be the main driver of growth next year, Yilmaz said.

  Outlook

But growth is still not boosting inflation to an extent that the central bank is ready to hike rates.

"Growth is still moderate, although we expect it to increase more rapidly in the second half," Yilmaz said.

That factor, combined with the need to wait for the Fed, may delay a decision by the Turkish central bank even later. "The normalization of U.S. policy rates and concerns over global growth will continue to weigh on the performance of domestic markets, in our view," Mercan said.