The central bank in Turkey kept rates on hold Thursday, pointing to the end of a rate-tightening cycle.
The yield on the Turkish 10-year bond was hovering near 10.2%. The iShares MSCI Turkey exchange-traded fund (TUR) slipped 1.2% in morning trading, while the iShares MSCI Emerging Markets ETF (EEM) fell 1.3%.
Turkey’s central bank has raised the average cost of funding by around 350 basis points this year and analysts largely expected that the central bank would keep the one-week repo rate at 8%, the overnight rate at 9.25%, and the late liquidity rate – the key rate for monetary policy – at 12.25%, notes Capital Economics Economist William Jackson.
The World Bank projects Turkey’s gross domestic product growth will rebound to 3.5% in 2017 from 2.5% in 2016, a year impacted by a coup attempt and extended state of emergency. The World Bank sees GDP growth moving slightly higher in 2018, to 3.9%.
Hawkish comments from the monetary policy committee — the accompanying statement said that the recent food price spike will unwind, bringing the headline inflation rate down — mean that a shift towards interest rate cuts this year is unlikely, Jackson writes, adding:
“Our sense is that policy easing, as and when it does come, is more likely around the middle of next year. At that point, growth will probably be slowing and inflation will have moved into a more comfortable range for the central bank (probably under 9%). At that point, we think the late liquidity rate may be lowered by around 175 basis points, to 10.50% by year-end.”