Turkish central bank to hike rates 175 points to 12pc

ISTANBUL: Turkey's central bank is expected to keep tightening policy in the face of a sliding lira and raise its key interest rate by 175 basis points to 12pc this week, a Reuters poll showed on Monday.

The bank is seen raising its one-week repo rate a bit more by year end after it surprised last month with a 200-point hike meant to address double-digit inflation and a record-low lira.

The currency has since dipped another 4pc against the dollar, adding more upward pressure on import prices.

That has set the stage for more tightening despite a coronavirus pandemic that severely contracted Turkey's economy in the second quarter.

The expectations of 17 economists polled by Reuters ranged between hikes of 100 basis points and 300 basis points at Thursday's policy meeting.

The median put the rate at 12pc, just above annual inflation.

For year end, the median forecast of 15 economists was for a 12.25pc interest rate, though views ranged to as high as 17pc.

The central bank is also expected to continue so-called back door measures to tighten credit by raising the average cost of funding, which was 12.26pc on Friday, up from a low of 7.34pc in mid-July just before the lira started tumbling.

Such funding costs would rise to 13pc by the end of October, according to the median poll response of seven economists.

They were seen rising to about 13.50pc by year-end.

The tightening cycle that began in July should help "rebalance the economy," said Blaise Antin, head of EM sovereign research at Los Angeles-based TCW.

"But Turkish economic policy credibility is very low (and) it's not clear that there's a commitment to doing this in a sustained way," he said.

The formal rate hike in September reversed a nearly year-long easing cycle in which the policy rate fell rapidly from 24pc, where it was set in the face of a 2018, currency crisis.

The latest lira selloff was prompted by negative real rates and high inflation, the central bank's badly depleted FX reserves and concerns over sanctions amid tensions between Turkey and both the European Union and the United States.

The currency has lost 25pc versus the dollar this year.

Uncertainty around potential EU sanctions and elevated domestic price pressure requires further tightening, Deutsche Bank said in a note, adding that the average funding rate should be at least 13.50pc in the fourth quarter.

It added that the economic recovery would be pressured by increased geopolitical tensions and the coronavirus outbreak.

The central bank is scheduled to announce its rate decision on Oct. 22 at 1100 GMT.