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Turkey’s central bank likely to hike policy rate to 20%

Turkey lira reserves Reuters/Dado Ruvic
The value of Turkey's lira has plummeted in recent years, but significant interest rates hikes have created more optimism

Turkey’s central bank is expected to raise its policy rate to 20 percent this week, a Reuters poll showed on Monday, though some economists expect a smaller increase after hikes in previous months remained below expectations.

The central bank embarked on a tightening cycle in June, after President Tayyip Erdoğan appointed former Wall Street banker Hafize Gaye Erkan as governor.

As part of the policy pivot, the bank has tightened its one-week repo rate by 900 basis points, raising it from 8.5 percent to 17.5 percent, still far below annual inflation at 47.83 percent.

It has promised to gradually tighten policy further as necessary to avoid the negative impact of high rates on the economy.

The median estimate of 17 institutions in the Reuters poll was for a 250-basis-point hike in the policy rate to 20 percent, with forecasts ranging from 18 percent to 20.50 percent.

“Durable disinflation is unlikely in an environment where the real policy rate is set to remain deeply negative, even if modest policy rate hikes are complemented by macro-prudential tightening,” HSBC said in a note.

It predicted that the policy rate will rise to 30 percent by December, but added that risks were still tilted towards a lower terminal policy rate.

The bank has also begun to simplify macro-prudential measures – tools to ensure the financial system’s stability – implemented under the former governor, and has supported the rate hikes with qualitative and selective credit tightening. This weekend, it began rolling back a costly scheme that protects lira deposits against forex depreciation.

Turkey’s central bank sees annual inflation at 58 percent at the end of the year, due to the lira’s depreciation as well as various tax hikes Ankara recently introduced.

Economists expect the bank to continue to hike rates, and see the policy rate at 25 percent by year end, according to the median estimate of seven economists, with forecasts ranging between 20 percent and 30 percent.

The central bank will announce its rate decision at 11:00 GMT on August 24.