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Turkey to keep interest rate unchanged this week, but hike imminent: Reuters poll

This photograph taken on June 9, 2023, shows the central bank of Turkey, in Ankara. (Photo by Adem ALTAN / AFP)

Turkey’s central bank is expected to leave its key interest rate unchanged at 45 percent this week, holding steady for the second month in a row, though most economists forecast another rate hike later this year, a Reuters poll showed on Monday.

The central bank has recently been tightening policy, including tightening reserve requirements, which has prompted some banks to reduce or even stop lending. On Saturday the bank raised the maximum interest rate for cash withdrawals with credit cards.

All but two of the 22 respondents in the Reuters poll  expected the bank to leave its policy rate unchanged in March, while two predicted a 250 basis point increase. The poll also showed that eight out of 12 respondents expected the bank to raise the policy rate again later this year.

In a previous Reuters poll conducted in February, economists expected a cut in the policy rate of 500 to 750 basis points by the end of the year.

While the central bank left its key rate at 45 percent last month after an aggressive tightening cycle, Finance Minister Mehmet Şimşek promised tighter fiscal policy last week to help the bank reduce inflation.

Authorities are expected to take further measures to cool inflation after local elections on March 31, causing further pain for Turks who have already been struggling with rising prices for years.

In an interview with broadcaster Kanal 7 on Sunday, Şimşek said he believed inflation would be within the central bank’s forecast range with additional fiscal policy measures in the coming period.

“If we believe this won’t be the case, we’ll take additional measures. This is a matter that is the responsibility of the central bank,” Şimşek said, adding that the central bank has a free hand and will do whatever is necessary to lower inflation.

Following the re-election of President Recep Tayyip Erdoğan in May, Turkey has abandoned years of unorthodox low interest rate policy supported by the president in favor of tightening, raising the key rate from 8.5 percent to 45 percent since June.

Capital Economics said in a research note to clients that data released since February’s hold decision by the central bank suggest that the disinflation process has taken a step back and the risk of a restart to the rate hike cycle is growing.

A rate hike “looks unlikely given how close it is to the local elections taking place on 31st March. But the statement will likely maintain a hawkish tone and the possibility of a 250-500bp hike in April is becoming more likely,” Reuters quoted Capital Economics as saying.

Goldman Sachs, which expects the central bank to raise rates by 250 basis points this week amid mounting pressure on reserves and the lira, said the central bank has already tightened policy through macroprudential measures and reserve requirements

“We think the purpose of the hike will mostly be to signal that the central bank will and can hike if needed in line with its own guidance and avoid the risk that the macro prudential measures taken in response are interpreted as a return towards a less orthodox policy framework,” Reuters quoted Goldman Sachs as saying.

On Friday the central bank’s monthly survey of market participants’ expectations showed that Turkey’s year-end annual inflation was seen at 44.19 percent, higher than the bank’s own forecast of 36 percent.

The bank will announce its rate decision at 1100 GMT on March 21.

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