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Turkey holds rate at 8.5% ahead of May elections

REUTERS/Umit Bektas/
Ankara has secured some $28 billion in currency swap deals in recent years

Turkey’s central bank kept its policy rate at 8.5 percent on Thursday as expected, stressing the importance of supportive financial conditions to preserve economic growth momentum in its last policy meeting before May 14 elections.

In February, the bank cut its key interest rate by 50 basis points (bps) to provide stimulus after earthquakes which killed more than 50,000 people in Turkey and left widespread destruction. Rates were unchanged in March.

“The committee assessed that the current monetary policy stance is adequate to support the necessary recovery in the aftermath of the earthquake,” the central bank’s policy committee said.

“Leading indicators show that the economic activity in the earthquake zone has been recovering faster than expected.”

Even before the quakes, analysts had said easing was possible before the presidential and parliamentary elections, in which President Tayyip Erdogan faces the biggest political challenge of his two-decade rule.

The lira was unchanged at 19.4 against the dollar after the central bank statement.

Last year the bank cut its key rate by 500 bps in an unorthodox easing cycle designed to counter an economic slowdown, before keeping it steady at nine percent in December and January. The stimulus came even as inflation soared above 85 percent last year and dipped only to 50.5 percent in March.

A self-described “enemy” of interest rates, Erdogan has urged monetary stimulus over the last several years to boost growth and exports, though it set off a series of lira crises and stoked prices.

Some anticipate a return to orthodox policies after the elections, with the policy rate seen rising to 24 percent in the third quarter, according to the median estimate in a Reuters poll.

Erdogan said last week that rates would keep falling as long as he is in power. He said inflation would fall with them, reiterating his unorthodox views.

Inflation was seen remaining elevated through the year despite the hikes and falling only to 46.4 percent at end-2023, the Reuters poll found.

Liam Peach, senior emerging markets economist at Capital Economics, said the rates outlook depended on the elections.

“A victory for President Erdogan would probably maintain pressure on the CBRT to pursue very low interest rates, while an opposition victory would probably lead to an improvement in central bank independence and a sharp rise in interest rates,” he wrote.

Currency crisis

The unorthodox rate cuts sparked a currency crisis and to keep the lira from declining further, Ankara launched a scheme that protects lira deposits against forex depreciation (KKM).

The demand for KKM has reached the highest this year due to concerns about a possible lira decline after the elections and after the maximum interest rate limit on those accounts was lifted.

The total deposits in the accounts rose by $10 billion in the two weeks to April 20, according to data from the BDDK banking watchdog, while total deposits stood at $102.3 billion. The interest rates on KKM accounts doubled to more than 20 percent in lira terms, according to bankers.

While economists see the lira’s fair value at around 23-25 against the dollar, expectations of a decline in the currency after the elections has raised the demand for hard currencies.

The central bank’s gross forex reserves dropped some $5.4 billion to $116.1 billion in the week to April 21, as it sought to limit forex demand.