Turkey Set to Hike Rates as Inflation Risks Grow: Decision Guide


Turkey’s central bank is expected to resume interest-rate increases after rising oil prices and recent lira volatility sent inflationary risks climbing.

All but one of the 24 economists surveyed by Bloomberg predict borrowing costs will be raised by 100 basis points to 18% on Thursday. Turkish inflation accelerated for a fifth month in February on an oil rally and the lingering impact of last year’s lira weakness, fueling expectations the central bank will try to rein in prices by raising interest rates.

Key Insights

Governor Naci Agbal told investors earlier this month that the central bank would monitor the impact of global commodity prices and supply disruptions on inflation for two weeks before its decision, according to people who attended the teleconference. The governor said the monetary authority is ready to raise borrowing costs this month if inflationary risks warrant, the people said, speaking on condition of anonymity.

Oil prices have skyrocketed from below $20 a barrel at the height of global coronavirus lockdowns last year to nearly $70 as the rollout of Covid-19 vaccines improves the demand outlook, and output cuts from OPEC+ members tighten supply. Crude is up more than 30% this year and around 3% this month.

The recent depreciation of the lira, which lost more than 8% against the dollar since mid-February, is also putting pressure on Agbal. The currency’s weakness is mostly related to the spike in U.S. Treasury yields, which has triggered a developing-nation currency selloff.

But before that, the governor had ended a complicated funding structure and hiked the one-week repo rate by 625 basis points after taking over in November, boosting the bank’s credibility among investors. Despite the recent decline, the lira has strengthened around 14% under his watch, as expectations grow Turkey’s returning to more orthodox monetary policy. He stood pat in the past two meetings, opting for hawkish messages.

Turkey Set to Hike Rates as Inflation Risks Grow: Decision Guide

What Economists Say

“We believe that there is a diminished chance of the CBRT being able to achieve its inflation target over the medium term if it does not proactively hike interest rates at this critical juncture,” said Phoenix Kalen, London-based director of emerging-market strategy at Societe Generale, who penciled in a percentage-point hike.

The sole dissenter who expects the central bank to hold says he would raise the rate if he were governor but expects Agbal to balk because of pressure from President Recep Tayyip Erdogan, who champions lower rates.

“In these exact conditions I would hike, but we’re in the business of trying to forecast what they will do, not what they should do,” said Cristian Maggio, head of emerging markets at TD Securities in London. “The two things don’t always match. In Turkey, they almost never do.”

Dates to Watch

Agbal has pledged to maintain a tight monetary policy stance until he meets his 5% inflation target, no earlier than 2023. The Turkish statistics agency will publish March inflation data on April 5.

Turkey Set to Hike Rates as Inflation Risks Grow: Decision Guide

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