Turkey to keep policy rate at 14 per cent despite energy surge

Turkey’s central bank is expected to hold its policy rate at 14 per cent this week, a unanimous Reuters poll showed on Monday, despite the Ukraine conflict and soaring energy prices that are set to send domestic inflation well beyond last month’s 54 per cent.

Most economists polled expect the key interest rate to remain steady through year-end, reflecting no apparent U-turn in President Tayyip Erdogan’s unorthodox economic policy plan.

The central bank paused an easing cycle in January after its cuts totaling 500 basis points last year sparked a currency crisis in November and December, sending inflation to 20-year highs.

Prices surged across the board as the lira lost 44 per cent against the dollar last year and another 10 per cent so far in 2022, mainly due to initial fallout from Russia’s invasion of Ukraine, which has compounded Turkey’s economic turmoil.

Economists see inflation rising to near 70 per cent as the lira declines and energy prices add further pressure. But they say a rate hike is off the cards, given Erdogan’s aversion to high borrowing costs.

All 18 economists in the Reuters poll predicted the central bank will keep its one-week repo (TRINT=ECI) rate unchanged on Thursday at 14 per cent, where it was set in December. The easing cycle began in September when it was cut from 19 per cent.

The rate cuts were part of Erdogan’s new economic programme that prioritises a current account surplus, growth, exports, credit and employment.

But the monetary easing, high inflation, and badly depleted official reserves have left the economy – which imports almost all its energy needs – vulnerable to the global surge in oil, gas and grains prices.

Economists are raising current account deficit forecasts and cutting expected tourism income, given Russia and Ukraine are the first and third biggest respective sources of holidaymakers.

A rate hike would relieve some of this pressure by boosting the lira and containing inflation expectations, economists say.

But authorities have sought to stabilise the lira and eventually address inflation by using a state-backed deposit-protection scheme, costly market interventions and tapping central bank reserves to meet state entities’ forex needs.

Goldman Sachs said authorities would hike rates if they were following an orthodox strategy but there is no sign they will abandon their current plan.

“We expect the pressure on the lira to continue and think that the authorities will need to respond. However, we expect this response to be in the form of FX interventions, new instruments and other heterodox measures,” Goldman said.

The median estimate of eight of nine polled economists predicted the year-end rate at 14 per cent. One predicted a cut to 12 per cent.

The central bank will announce its rate decision at 1100 GMT on March 17.