Turkey’s central bank to hold rates steady despite 61% inflation

ISTANBUL: Turkey’s central bank is expected to keep its policy rate unchanged at 14% this week and carry on with an unorthodox policy despite an expected further rise in inflation after it hit 61% last month, a Reuters poll showed on Monday.

Some economists now expect the bank to reverse monetary policy later this year and hike rates due to price pressures and lira weakness.

The central bank slashed its policy rate by 500 basis points at the end of last year in an easing cycle long sought by President Tayyip Erdogan, who contrary to economic theory says high rates cause inflation.

Turks’ foreign currency holdings fall to $215.98bn

The policy easing sparked a currency crisis which sent inflation soaring, stoked in part by surging energy prices due to Russia’s invasion of Ukraine in February.

The central bank held rates steady at 14% at the last three meetings, leaving real rates deeply negative and well beyond those in other emerging markets.

All 18 economists in the poll predicted policymakers would keep the one-week repo rate unchanged, though three predicted the bank would begin raising rates later this year.

“Although the Turkish authorities have a stated preference for lower rates, we think that a rate cut is unlikely as inflation continues to increase and the current account balance continues to deteriorate,” Goldman Sachs said.

It said that the bank would have “already substantially” hiked rates if Turkey were pursuing a more orthodox policy and that there is no sign that it will abandon the current heterodox strategy.

“Going forward, we expect the pressure on the lira to continue and think that the authorities will need to respond,” it said, adding that this will likely come in the form of forex interventions and new instruments.

Four economists predicted that the policy rate will stand at 14% at year-end, with one predicting a further cut to 12% by then.

Three economists expected a policy turnaround due to pressure on the lira, high inflation and hikes by other central banks. They separately estimated hikes to 15%, 20% and 25%.

Several economists cited unpredictability of the central bank and have declined to participate in polls in recent months.

Led by transportation, including petrol, and food prices, the annual price inflation rose to 61.14% in March. It is expected to rise further to more than 70% in coming months, eating deeply into the earnings of households facing soaring living costs.

The currency crisis sparked by the central bank’s easing cycle saw the lira lose 44% against the dollar last year, which stoked inflation via imports priced in hard currencies.

The central bank will announce this month’s rate decision at 1100 GMT on April 14.