Turkiye’s central bank extended its interest-rate pause for a fifth month, signalling it remains focused on further lowering one of the world’s highest inflation rates and reaching its ambitious year-end target.

The Monetary Policy Committee, led by Governor Fatih Karahan, kept the one-week repo rate at 50% on Tuesday, in line with the forecasts of all economists surveyed by Bloomberg.

Officials want to slow year-on-year inflation, now at 62%, to 38% by the end of December. Markets see it being closer to 42%, the upper end of the central bank’s projections, by that stage.

Turkish households and businesses have even higher expectations and - given how that’s impacting domestic demand and price-setting behaviour - the central bank is keen to tame them.

The central bank has embarked on a U-turn since June last year, when it began a series of rate hikes that ended an era of ultra-loose monetary policy championed by President Recep Tayyip Erdogan. The change happened as Erdogan and his officials sought to bring back foreign investors that fled Turkish markets as inflation soared.

While tighter monetary and fiscal policies have won plaudits from bond and stock investors, in recent months the central bank has had to contend with a decline in lira deposit rates. That’s prompting some Turks to buy dollar assets again and is going some way to countering the central bank’s measures to combat inflation, according to Goldman Sachs Group Inc economists including Clemens Grafe.

“If it continues, dollarisation is likely to delay the easing of the monetary policy,” they said in a note to clients. 

Discussions about the timing of rate reductions are likely to become more pronounced next month as an economic slowdown sets in further.

A measure of Turkish manufacturing activity has been below 50, the threshold that separates expansion from contraction, for the last four months. Industrial production is falling in annual terms and unemployment is rising.

There was a “stronger deceleration in aggregate demand” late in the second quarter and tighter financial conditions may lead to a “deeper correction” in the current one, Garanti BBVA Research analysts, including Ali Batuhan Barlas, said before the central bank’s decision. “The magnitude of the expected fiscal consolidation and the duration of tight monetary stance will be decisive on growth outlook.”

  - Bloomberg