Will Turkey cut interest rates again despite roaring inflation?

Will Turkey slash interest rates again?

Turkey’s rate-cutting streak is set to continue when policymakers meet on Thursday, as its president calls for its key interest rate to fall to single digits this year, even as inflation accelerates past 85 per cent.

The monetary policy committee has slashed the benchmark rate by a cumulative 3.5 percentage points since August to 10.5 per cent. It is expected to cut the rates by another 1.5 percentage points, according to Reuters poll.

Sahap Kavcıoğlu, the central bank governor, has acknowledged his lack of success in slowing inflation, but said last month he expects price growth to peak this autumn after hitting its highest level in a quarter of a century.

He faces pressure from president Recep Tayyip Erdoğan who wants ultra-loose monetary policy to juice up the economy ahead of elections next year. Erdoğan has called himself “an enemy of interest” and contrary to mainstream economic theory, believes that high rates feed inflation rather than slow it.

The growth-at-all-costs policy has hammered the lira, which has lost nearly 43 per cent of its value against the dollar in a year. The lira has steadied in recent months after a series of interventions by the central bank and policies pursued by the government.

Turkey’s real interest rate, which adjusts for inflation, is among the lowest in the world at minus 75 per cent. Many economists now shrug off the bank’s policy decisions, and private banks rely on other interest rates that move independently of the benchmark, such as deposit rates, said Haluk Burumcekci, the founder of Burumcekci Research and Consulting.

“It doesn’t make much difference if the rate is 10.5 per cent or 9 per cent,” he said. Ayla Jean Yackley

What will PMI data reveal about the health of Europe’s economy?

A series of closely watched survey of business confidence is expected to add evidence that the UK economy has already fallen into a recession and the eurozone is following behind.

The purchasing managers’ indices, published on Wednesday, is forecast to show a contraction in activity compared to the previous month.

Economists polled by Reuters expect the UK composite PMI index, a measure of activity in the manufacturing and services sector, to have declined to 47.5 in November from the October reading of 48.2. Any reading below 50 indicates a majority of businesses reporting deteriorating activity.

The UK economy already contracted in the second quarter and the Office for Budget Responsibility, the independent body charged with analysing public finances, expects it to be in recession until the final quarter of next year as high inflation and higher borrowing costs hit households and businesses.

Analysts also expect the eurozone PMI to contract even as its economy expanded in the third quarter. Economists forecast the PMI Composite index will decline to 47 in November, from 47.3 in the previous month.

“With little in the way of major new news to shift the economic narrative and inflation still high at 10.6 per cent in October, we expect economic conditions to remain weak,” said Ellie Henderson, economist at Investec.

Many economists forecast that the eurozone recession will end in the first quarter of next year as government support measures help drive a recovery from the spring.

Frédérique Carrier, head of investment strategy at RBC Wealth Management, noted that “the UK seems to be the first major economy to enter recession, and could be the last to exit.” Valentina Romei

What did Fed officials discuss at the last policy-setting meeting?

Federal Reserve officials agree that the central bank should continue to raise interest rates, but opinions diverge on the peak of the interest rate cycle.

Minutes from the Fed’s early November rate-setting meeting will provide clues on what was discussed by policymakers when they enacted their fourth-straight 0.75 percentage point rate rise.

Since the last meeting, Mary Daly, who leads the San Francisco Fed branch, said the central bank could raise rates to the range of 4.75 to 5 per cent and then pause, while St Louis branch president Jim Bullard is more hawkish and suggested that the benchmark rate could go as high as 7 per cent. The central bank has already boosted the federal funds rate from near zero at the start of the year to a range of 3.75 to 4 per cent.

Mixed signals on the state of the economy have also clouded the outlook.

While lay-offs at big technology companies have drawn headlines, the US labour market remains tight. Americans filed 222,000 new jobless claims in the week ended November 5, a historically low figure.

On the other hand, October’s consumer price index and producer price index reports pointed to a slowdown in inflation, but both figures are significantly higher than the Fed’s 2 per cent inflation target.

“The US economy is sending us some wildly mixed signals,” Minneapolis Fed president Neel Kashkari said in a speech last week. “It’s an open question of how far we’re going to have to go with interest rates.” Jaren Kerr

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