Central Bank of Turkey to stay put in Thursday’s MPC, but rumors suggest rate hike

Turkey’s central bank is expected to hold its policy rate at 14% this week, a unanimous Reuters poll showed on Monday, despite the Ukraine conflict and soaring energy prices that are set to send domestic inflation well beyond last month’s 54%.


Polls by two Turkish  news agencies, too, show participants don’t expect the policy rate to move.

However, two credible journalists claim Central Bank is urging Erdogan “to permit” a rate hike.  It is difficult whether the reports by journalists form the investor opinion, but if rate hikes are expected and not delivered, TL could go into another tail-spin.


Most economists polled expect the key interest rate to remain steady through year end, reflecting no apparent U-turn in President Tayyip Erdogan’s unorthodox economic policy plan.



The central bank paused an easing cycle in January after its cuts totaling 500 basis points last year sparked a currency crisis in November and December, sending inflation to 20-year highs.


Prices surged across the board as the lira lost 44% against the dollar last year and another 10% so far in 2022, mainly due to initial fallout from Russia’s invasion of Ukraine, which has compounded Turkey’s economic turmoil.   There are numerous unconfirmed reports of Central Bank selling FX to stabilize the value of TL, which are denied.




Economists see inflation rising to near 70% as the lira declines and energy prices add further pressure. But they say a rate hike is off the cards, given Erdogan’s aversion to high borrowing costs.


All 18 economists in the Reuters poll predicted the central bank will keep its one-week repo rate unchanged on Thursday at 14%, where it was set in December. The easing cycle began in September when it was cut from 19%.


The rate cuts were part of Erdogan’s new economic programme that prioritises a current account surplus, growth, exports, credit and employment.


But the monetary easing, high inflation, and badly depleted official reserves have left the economy – which imports almost all its energy needs – vulnerable to the global surge in oil, gas and grains prices.


Economists are raising current account deficit forecasts and cutting expected tourism income, given Russia and Ukraine are the first and third biggest respective sources of holidaymakers.


A rate hike would relieve some of this pressure by boosting the lira and containing inflation expectations, economists say.


But authorities have sought to stabilise the lira and eventually address inflation by using a state-backed deposit-protection scheme, costly market interventions and tapping central bank reserves to meet state entities’ forex needs.




Fed Interest Rate Hikes Will Hurt Turkish Economy (And Other Emerging Markets) Badly | Real Turkey


Goldman Sachs said authorities would hike rates if they were following an orthodox strategy but there is no sign they will abandon their current plan.


“We expect the pressure on the lira to continue and think that the authorities will need to respond. However, we expect this response to be in the form of FX interventions, new instruments and other heterodox measures,” Goldman said.


The median estimate of eight of nine polled economists predicted the year-end rate at 14%. One predicted a cut to 12%.


However, in recent days, journalists Ercan Inan and Remzi Ozdemir wrote that Central Bank officials were in contact with Erdogan’s advisors, urging them to permit a rate hike. Inan and Ozdemir claim Central Bank wants a salutary 200 basis point rate hike to calm down the jittery currency market. Remzi Ozdemir goes further, by reporting that the first hike will be flowed by a massive 1,000 basis points in the  April meeting. So far there has been no official commentary to confirm or deny these rumors.  Erdogan who usually curses high interest rates before Central Bank MPCs has been quiet,  however this may be because of his preoccupation to mitigate the fallout from the Ukraine Crisis.



The central bank will announce its rate decision at 1100 GMT on March 17.

Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.