Turkey set to raise rates, balancing lira and growth concerns
The lira has slumped 40 percent against the dollar this year, weakened
partly by unease over President Recep Tayyip Erdogan’s influence on
monetary policy
The central bank confounded expectations for a rate increase at its
July meeting, fueling the belief it is under pressure from Erdogan
ISTANBUL: The Turkish Central Bank is expected to raise interest rates
on Thursday to calm a currency crisis, but forecasts for the scale of
the increase vary widely as the bank balances concerns over lira
weakness with worries about an economic slowdown.
The lira has slumped 40 percent against the dollar this year, weakened
by unease over President Recep Tayyip Erdogan’s influence on monetary
policy and more recently a bitter row with the US that has unsettled
investors.
The central bank confounded expectations for a rate increase at its July
meeting, fueling the belief it is under pressure from Erdogan, who has
called interest rates the “mother and father of all evil” and frequently
urges they be kept low.
But after inflation surged in August to its highest in nearly 15 years,
the central bank said that it would take action against “significant
risks” to price stability — a rare move to soothe financial markets.
It said its monetary stance will be adjusted at Thursday’s policy
committee meeting. Analysts saw this as pointing to an increase in the
benchmark one-week repo rate, now 17.75 percent — less than the annual
inflation rate of 17.9 percent.
Phoenix Kalen, strategist at Societe Generale, forecast the repo rate
would be raised to 20.75 percent and would be restored as the main
policy instrument after a period during which the effective funding rate
has been 19.25 percent.
“Although this amount of monetary tightening may disappoint market
expectations and spark renewed TRY weakness, the decision would reflect
the prioritization of Turkish authorities’ concerns regarding a rapidly
decelerating economy,” Kalen said.
Turkey’s economic growth slowed to 5.2 percent in the second quarter,
data showed this week, and the economy is expected to slow again in the
second half.
In a Reuters poll, all 11 economists predicted the benchmark one-week repo rate would be raised.
The average forecast was to 22 percent, but predictions ranged from an increase of 225 basis points to 725 basis points.
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