(Bloomberg) --
Turkey’s central bank will probably cut borrowing costs one more time this year, according to economists at some of the world’s biggest banks, amid a worsening inflation outlook and a shrinking rate of return for investors.
An uninterrupted easing cycle started almost a year ago when Turkey’s key interest rate was at 24% following a currency crash. All but two of the 20 analysts in a Bloomberg survey predict the central bank will lower its benchmark again on Thursday, with more than half seeing a quarter-percentage point cut to 8%.
Analysts at JPMorgan Chase (NYSE:JPM) & Co. and Barclays (LON:BARC) Plc believe this will likely be the final reduction of 2020, while Goldman Sachs Group Inc (NYSE:GS). and Oxford Economics are warning of a risk that rates may soon have to rise.
Complementing the monetary easing delivered since Governor Murat Uysal’s abrupt appointment last July, the central bank has also been pumping money into the economy at the fastest pace in over a decade to contain the fallout of the coronavirus pandemic. After nine straight rate decreases, Turkey has one of the lowest yields in the world when adjusted for prices.
Even with a recent upswing inflation, the central bank has suggested the acceleration is likely temporary, a sign for Morgan Stanley (NYSE:MS) that nothing stands in the way of additional rate cuts.
“We think that the inflation print would not discourage Turkey’s central bank from further easing,” Morgan Stanley economists Alina Slyusarchuk, Andrea Masia and Georgi Deyanov said in a report to clients.
Interrupting the easing cycle would carry risks for Uysal, whose predecessor was fired by President Recep Tayyip Erdogan for not reducing rates. Contrary to the thinking of most economists and central banks, Erdogan believes lower borrowing costs are more effective at slowing prices.
The central bank, which says it still provides a “reasonable” real rate of return based on projected price growth, lowered its inflation expectations for the end of this year to 7.4% in April, less than a previous forecast of 8.2%.
A rebound in energy markets now “adds upward pressure from here,” according to Barclays economists including Ercan Erguzel, who expect a 50 basis-point rate cut on Thursday to conclude the easing cycle.
The price outlook has started to show signs of deterioration. Turkey’s consumer inflation unexpectedly quickened to an annual 11.4% in May, snapping two months of declines, as elevated food costs offset some of the impact from weaker demand.
Now that real rates are at their lowest since 1913, according to JPMorgan, the central bank may be ready to call time on its easing cycle. With a “final” cut of 25 basis points this week, policy makers could “signal the beginning of a wait-and-see period with no imminent rate changes,” JPMorgan analysts including Yarkin Cebeci said in a report to clients.
“Along with rapid loan growth, such low rates constitute significant support for domestic demand and if sustained could jeopardize the disinflation,” they said. “Lower yields hurt the lira’s attractiveness and prevent the capital inflows that are needed for sustainable economic growth.”
(Updates with JPMorgan’s comment in final paragraph)
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