Turkish central bank to keep policy rate at 19pc this week

ANKARA: Turkey's central bank is expected to keep its policy rate at 19% at its first meeting after President Tayyip Erdogan fired the hawkish former governor, a Reuters poll showed on Monday, while some warn that a surprise cut would hit the lira hard.

While Erdogan's removal of Naci Agbal last month led to expectations that rates would be slashed immediately, Governor Sahap Kavcioglu's promises of tight policy have convinced analysts that the bank will forego a rate cut on Thursday.

All but two of 19 economists that participated in a Reuters poll forecast that the central bank would keep its one-week policy rate unchanged this week.

One predicted a cut to 18.50% and another to 17%.

But expectations of a rate cut this year have been brought forward after Kavcioglu's appointment, with five of 14 respondents expecting a cut this quarter, seven in the third quarter and two in the fourth.

In a previous poll done before Agbal's dismissal, 10 respondents saw a cut in the third quarter and eight saw it in the fourth quarter.

The median estimate of 12 economists for the policy rate at year-end stood at 15%, with forecasts ranging between 10% and 20%.

The range of forecasts reflects the central bank's difficult position of trying to balance rising inflation - at 16.19% in March - and calls from Erdogan for lower rates, partly to support growth as Turkey battles the fallout from the COVID-19 pandemic.

While some economists believe the central bank will need to hike further to head off inflation that is expected continue rising, others say the bank will have to succumb to Erdogan's calls and begin cutting - possibly prematurely.

Any reduction of real yields is likely to lead to another selloff in the lira and other Turkish assets, after investors dumped the highest amount of bonds and stocks in 15 years in the week following Agbal's dismissal.

Inflation is expected to rise in April and perhaps May before beginning to fall. Any decline in the lira risks further raising inflation via imports.

Only three out of 13 economists expected a further hike to the policy rate this year, the poll showed.

Any surprise cut to the policy rate this week could lead the lira to lose 15-20% of its value and drop to around 9.50-10 against the dollar, Morgan Stanley said in a note.

Erdogan, who believes high rates cause high inflation, unexpectedly fired the past three central bank governors.

"So long as he is able to deliver on President Erdogan's desire for lower interest rates, (Kavcioglu) will keep his job," said Jason Tuvey, senior EM economist at Capital Economics.

"But we suspect sticking to that policy will become increasingly difficult towards the end of 2021 and into 2022."

The central bank will announce its rate decision at 1100 GMT on April 15.