Turkey’s central bank will bring interest rates to single digits within months, as demanded by President Recep Tayyip Erdoğan, before they start to rise again next year as price pressures bubble up, according to Goldman Sachs Group Inc.
“The authorities will prioritize growth and reduce the policy rate as much as possible without destabilizing the lira,” Goldman Sachs economists Murat Unur and Clemens Grafe said in a report, according to Bloomberg. “Recent inflation dynamics and growth in money aggregates, in our view, also increase the risk of renewed lira volatility.”
The central bank is not done yet, even after shocking much of the market with an easing cycle that’s more than halved Turkey’s benchmark since last July to 11.25 percent.
Erdoğan has been promising to deliver rates in single digits this year and believes inflation will follow suit — a reflection of his unorthodox view that lower borrowing costs are more effective at slowing prices. Most economists and central banks around the world believe the opposite to be true.
“We were wrong in particular about how rapidly Turkey’s central bank could cut rates without undermining money demand or leading to renewed lira volatility,” Unur and Grafe said.
But with Turkish rates turning negative when adjusted for realized inflation, the lira is coming under more strain. On Friday it weakened past the 6-per-dollar mark for the first time since late May, breaking through a key level that state banks have been defending.
To stabilize the market, Turkey’s banking regulator announced on Sunday that it would limit the amount of hard currency local lenders can exchange for lira with foreign investors by cutting the limit on foreign-exchange swaps and derivatives deals.
The Turkish currency strengthened in Asian trading. Although Goldman economists are maintaining their end-2020 forecast for price growth at 9 percent, they warned that a “build-up of inflationary risks” may get in the way of monetary easing.