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

President Erdogan has frequently said high borrowing costs lead to high inflation, contrary to common theory
  • Apex bank rate cuts led to cost-of-living crisis
  • Hike would be first since March 2021
  • Further hikes seen with year-end median at 30%

Turkey’s central bank is expected to raise its policy rate by a huge 1,150 basis points next week, from 8.5 percent to 20 percent, a Reuters poll showed, in a policy U-turn after rate cuts under President Tayyip Erdogan led to a cost-of-living crisis.

The central bank slashed its policy rate from 19 percent in late-2021 to 8.5 percent as Erdogan, a self-described “enemy” of interest rates, implemented his unorthodox economic policy, prioritising growth, investment and exports.

But the rate cuts that came in the face of rising inflation led to a currency crisis, which in turn stoked inflation, sending it to a 24-year high of 85.5 percent last year. The central bank’s reserves were depleted as it sought to stabilise the lira’s exchange rate by countering soaring forex demand.

Facing economic turmoil as he was elected to his third term last month, Erdogan appointed Mehmet Simsek, highly regarded by markets, as finance minister, and Hafize Gaye Erkan, a former Wall Street banker, as central bank governor.

The appointments have heightened expectations that Turkey will abandon its unorthodox policies, which led the lira to shed more than 80 percent of its value since 2018.

The median forecast of 15 economists that participated in the Reuters poll for the one-week repo rate at next week’s monetary policy committee meeting was 20 percent, which would be the highest since mid-2019 and the first hike March 2021.

Forecasts ranged widely, from 12.5 percent to 30 percent, given that the central bank has not provided any signals about its next steps, including the pace and size of the hikes, since Erkan was appointed last week.

Erdogan appeared to say this week that he has given the green light for rate hikes with the caveat that he not changed his views. The president has frequently said high borrowing costs lead to high inflation, contrary to common theory.

Authorities are hoping foreign investors will return after years away, but market watchers warn that Erdogan has pivoted to orthodox policies in the past only to change his mind shortly after.

However all but one of 12 economists that took part in the poll for the policy rate at year-end expected further hikes with the median standing at 30 percent, and forecasts ranging between 18 percent and 35 percent.