Turkish Central Bank to Raise Policy Rate to 20%; Some Anticipate Smaller Increase

ISTANBUL (Reuters) – Turkey’s central bank is anticipated to raise its policy rate to 20% this week, according to a recent poll conducted by Reuters. However, some economists predict a smaller increase, as past hikes in recent months have not met expectations.

The central bank initiated a tightening cycle in June following President Tayyip Erdogan’s appointment of former Wall Street banker Hafize Gaye Erkan as governor. Since then, the bank has increased its one-week repo rate by 900 basis points, moving it from 8.5% to 17.5%. This figure remains significantly lower than the current annual inflation rate, which stands at 47.83%.

In its commitment to gradually tighten policy to mitigate the adverse effects of high interest rates on the economy, the central bank aims to ensure stability. The median estimate among 17 participating institutions in the Reuters poll indicated a 250-basis-point hike in the policy rate to reach the 20% mark, with forecasts varying between 18% and 20.50%.

HSBC noted in a report that genuine disinflation will be challenging under conditions where the real policy rate is likely to stay significantly negative, despite any modest increases in rates being coupled with macro-prudential adjustments. The bank forecasts the policy rate could climb to 30% by December, although it acknowledged that the risks lean towards a lower terminal rate.

Additionally, the bank has started to streamline some macro-prudential measures that had been introduced under the previous governor. It has also complemented rate hikes with selective credit tightening and has begun to unwind an expensive scheme designed to safeguard lira deposits against foreign exchange depreciation.

The central bank forecasts annual inflation to reach 58% by year-end, influenced by the depreciation of the lira and recent tax increases implemented by the government.

Economists are expecting the central bank to continue raising rates, with a median estimate from seven economists predicting a policy rate of 25% by the end of the year, ranging between 20% and 30%. The central bank is set to announce its rate decision at 1100 GMT on August 24.