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Turkey raises rate to 17.5% as inflation likely to soar

Turkish lira Reuters/Dado Ruvic
The Turkish currency touched a record low of 30.6150 earlier this week

Turkey’s central bank hiked its policy rate by 250 basis points to 17.5 percent on Thursday, continuing to reverse President Tayyip Erdogan’s low-rates policy.

However, the tightening fell short of expectations with inflation expected to rise sharply.

It was the second meeting under new governor Hafize Gaye Erkan. He is leading a change of course after the one-week repo rate was cut to 8.5 percent from 19 percent since 2021 despite soaring inflation.

The less-than-expected tightening comes expectations that inflation, which fell to 38.21 percent in June, will rise in the rest of the year. Economists are revising their year-end forecasts to as high as 60 percent due to the lira’s continued decline and various tax hikes in July.

The bank had raised its key rate by 650 basis points to 15 percent in June and had been expected to hike to 20 percent this time, according to the median estimate in a Reuters poll.

Economists expect further rate hikes this year, with the year-end forecast at 25 percent, which still leave real rates negative. But they warn that Erdogan’s influence over the central bank limits how far it can go in tightening policy.

Meanwhile, the central bank’s net international reserves rose slightly to $13.25 billion in the week to July 14, data showed on Thursday. It continued its rebound from record lows after the bank stopped using the reserves to support the lira.

The central bank’s net reserves fell to negative $5.7 billion in the week to June 2, their lowest since the data began being published in 2002, as authorities sought to counter forex demand and stabilise the lira’s exchange rate ahead of elections.

They turned positive again last month.

The central bank’s forex reserves have sagged in recent years due to costly market interventions and other efforts to cool forex demand.

Demand for dollars in Turkey surged to record levels in May on companies’ and individuals’ expectations that the lira, which lost 44 percent in 2021 and 30 percent in 2022, would plunge after the elections.

The currency has lost more than 30 percent so far this year, sharpening its decline last month in what traders said was a sign of Ankara moving away from state controls towards a freely traded currency.

The net forex reserves are still in negative territory once outstanding swaps, which stood at $40.1 billion on Wednesday, are deducted.