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Turkey holds rate at 9% despite soaring inflation

Reuters/Umit Bektas
Turkish President Tayyip Erdogan Erdogan’s government has employed a policy of tightly controlling the lira’s foreign exchange rate

Turkey’s central bank held interest rates steady at nine percent on Thursday despite soaring inflation, fulfilling a pledge to end a brief but sharp easing cycle after President Tayyip Erdogan had called for single-digit rates.

The bank, seen by analysts to respond to Erdogan’s will, repeated that inflation of near 85 percent should give way to a disinflation process. It gave no hint how long it would hold rates stable ahead of high-stakes elections in the coming months.

“Considering the increasing risks regarding global demand, the committee evaluated that the current policy rate is adequate,” the bank’s policy committee said, adding financial conditions must continue to support supply and investment gains.

After the policy decision, the lira neared the 18.6850 all-time low versus the dollar touched in the previous session.

All economists in a Reuters poll had predicted the bank (CBRT) would keep its policy rate unchanged. It cut it by 500 basis points in the last four months citing an economic slowdown, even as its global counterparts raced in the other direction.

Inflation, meanwhile, was running at 84.4 percent in November after touching a peak of 85.5 percent in October. It is expected to ease to 65-70 percent in December due to a favourable base effect after last year’s historic currency crash.

“The CBRT won’t deliver the hikes that are desperately needed to control inflation and regain credibility anytime soon,” said Nicholas Farr, emerging Europe economist at Capital Economics.

“(T)here is clearly a risk that President Erdogan forces the CBRT to restart its easing cycle, particularly with the 2023 elections approaching.”

Facing tight elections in May or June, Erdogan’s government has employed a policy of tightly controlling the lira’s foreign exchange rate with indirect foreign exchange sales to the market, and a heavy hand in directing credit in the economy.

Prices Surging

Prices began surging in autumn 2021, stoked by an unorthodox easing cycle that was urged by Erdogan but that sparked a currency crisis late last year.

Erdogan – a self-described “enemy” of interest rates whose economic plan prioritises exports, production and employment – said on Wednesday the central bank had lowered the policy rate to nine percent to help investments.

“Investors should not keep crying, saying ‘interest rates are high’. Here you go, it is nine percent. Now invest,” he said, adding this would bring employment, exports and a current account surplus, which Ankara says will permanently lower inflation.

Most analysts say monetary policy will likely remain steady until the election, after which it will depend on whether the opposition, which has promised a return to orthodox policies and rate hikes, wins.