Turkey Is Expected to Maintain Its Current Rate of Interest This Week, but an Increase Is on the Way

A recent Reuters poll indicated that the key interest rate at the Central Bank of Turkey is expected to remain unchanged at 45% this week. This would be the second consecutive month that the rate has remained unchanged. However, the vast majority of economists believe that interest rates could increase later in the year.

As a result of recent actions taken by the central bank to tighten policy, a number of financial institutions have reduced their available loan limits or even stopped providing loans altogether. Over the weekend, the bank raised the interest rate that was previously the highest possible for cash withdrawals made using credit cards.

Experts Do Not Forecast a Change in the Interest Rate in March

The vast majority of the 22 individuals who participated in the survey believe that the central bank will keep its policy rate unchanged in March. Only two of the respondents predicted that the rate would significantly increase by 250 basis points. In addition, the survey revealed that eight out of twelve respondents were of the opinion that the bank would raise interest rates at a later point in the year.

In a previous survey carried out in February, economists had anticipated a significant reduction in policy rates by the end of the year, with potential reductions ranging from 500 to 750 basis points.

Despite maintaining its key interest rate at 45% last month following a series of significant adjustments, Finance Minister Mehmet Simsek recently pledged to implement stricter fiscal measures to assist the central bank in curbing inflation.

Following the local elections on March 31, it is anticipated that authorities will implement additional policy measures to address inflation. This is likely to burden Turks further, who are already grappling with the consequences of persistently high prices.

During an interview with broadcaster Kanal 7 on Sunday, Simsek expressed confidence that implementing further fiscal policy measures would align inflation with the central bank’s projected range in the coming period.

“If we are of the opinion that this will not be the situation, we will implement further actions.” Addressing the matter falls within the jurisdiction of the central bank,” Simsek stated, emphasizing that the central bank has complete autonomy and will take all necessary measures to reduce inflation.

Following President Tayyip Erdogan’s re-election in May, Turkey made a significant shift in its monetary policy. The country moved away from its previous unconventional approach of maintaining low-interest rates, which the president had endorsed. Instead, Turkey opted for a more restrictive approach, gradually increasing its key rate from 8.5% to 45% since June.

According to a research note from Capital Economics, the information available since the central bank’s decision to hold rates in February indicates that the process of disinflation has experienced a setback and that the hiking cycle is increasingly likely to be resumed.

It seems improbable that there will be an increase in rates, especially considering the upcoming local elections on March 31. However, the statement is expected to maintain a cautious stance, and the likelihood of a 250-500bp hike in April is growing.

Goldman Sachs Predicts Rates to Rise in the Near Term

Goldman Sachs anticipates that the central bank will increase rates by 250 basis points this week due to the growing strain on reserves and the lira. The bank mentioned that it has already implemented policy adjustments through macroprudential measures and reserve requirements.

“According to Goldman Sachs, the hike is primarily intended to communicate the central bank’s ability and willingness to increase rates in accordance with its guidance. This move aims to prevent any misinterpretation of the macro-prudential measures as a shift towards a less conventional policy framework.”

According to the central bank’s latest monthly survey, market participants predict that Turkey’s annual inflation will reach 44.19% at the end of the year, surpassing the bank’s own forecast of 36%.

The bank is set to reveal its rate decision at 1100 GMT on March 21.