Turkey’s cenbank to deliver another substantial rate hike to 20 per cent

Turkey’s central bank is expected to raise its policy rate by 500 basis points to 20 per cent this week, a Reuters poll showed on Monday, making good on its pledge of further tightening with another sharp hike to curb inflation which is set to rise again.

The central bank raised its policy rate by 650 basis points in June to 15 per cent, while promising to continue tightening until a significant improvement in the inflation outlook is achieved.

The rate hike and the hawkish tone were the strongest signals of a reversal after years of loose policy under President Tayyip Erdogan, who was prioritising growth and investments.

The tightening still remained below expectations, with economists saying that Erdogan’s influence over the central bank limits how far they can go in tightening policy. Real rates are also still deeply negative.

Economists see a further hike this week to 20 per cent, according to the median estimate of 23 economists in a Reuters poll, with forecasts ranging between 17 per cent and 21.50 per cent.

“Anything less than a move to hike the policy rate to 20 per cent will be seen as disappointing and a signal that Erdogan is constraining what (Finance Minister Mehmet) Simsek and (Central Bank Governor Hafize Gaye) Erkan can do,” said Tim Ash of BlueBay Asset Management.

Turkey’s annual inflation surged to a 24-year high of 85.51 per cent last October, mainly due to the constant depreciation of Turkey’s lira due to Erdogan’s policy of low rates.

Inflation eased to 38.21 per cent by June but is expected to rise again. The year-end forecast stood at 51.50 per cent in the latest Reuters poll, but economists now say it will likely be around 60 per cent after Ankara hiked several tax rates to support its deteriorating budget and as the lira continues to decline.

The central bank was expected to keep hiking rates in coming months, with the median estimate of 13 economists in the Reuters poll for the policy rate at year-end standing at 25 per cent.

The forecasts ranged between 24 per cent and 35 per cent.

The central bank’s one-week repo rate (TRINT=ECI) had been slashed to 8.5 per cent from 19 per cent since 2021 under Erdogan’s economic programme. The bank had also used foreign exchange reserves to prop up the lira, which nonetheless plunged to a series of record lows.

As a result of the recent policy reversals, the central bank’s net international reserves rose to $13.17 billion in the week to July 7, continuing to rebound from a record low of $-5.7 billion it touched in June.

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