By Ali Kucukgocmen
ISTANBUL Turkey's central bank is expected to raise its policy rate sharply on Thursday in a strong signal that re-elected President Tayyip Erdogan has accepted some steps toward economic orthodoxy to address inflation that has soared under his watch.
The expected policy pivot, under new central bank chief Hafize Gaye Erkan, comes amid a cost-of-living crisis that saw inflation hit a 24-year high of 85.5% in October, before declining to just below 40% last month.
The lira currency, meanwhile, has skidded to record lows since last month's election.
All 18 economists in a Reuters poll predicted a rise in the one-week repo rate. But the level remains uncertain as the central bank has not given any signals as to its next steps, including the size or pace of potential hikes.
Some economists have expressed doubt about Erdogan's commitment to abandoning his unorthodox policy of low rates, which led the central bank to slash its policy rate from 19% in 2021 to 8.5% currently.
The median estimate was for a hike of 1,250 basis points to 21% this month. Predictions ranged from 12.50% to 30%, with some economists thinking hikes will be more gradual.
The central bank's foreign exchange buffer has dwindled, with net reserves touching a record low of negative $5.7 billion in May, reflecting authorities' efforts to prop up the lira.
Given the drawdown in reserves, analysts have warned of a potential balance-of-payments crisis as the country's current account deficit widened to $48.4 billion last year, its highest since 2013, mainly due to soaring energy prices.
The lira has lost more than 80% of its value since 2018, largely due to rate cuts in the face of rising inflation.
Authorities hope foreign investors and hard currency will return after a years-long exodus, potentially reducing the central bank's need to intervene to keep the lira stable.
GREEN LIGHT FOR HIKES
Malek Drimal, lead CEEMEA strategist at Societe Generale, forecast a hike to 15% and commitment to more hikes in coming months, with the policy rate reaching 25% in August.
"However, our clients would typically like to see a substantial tightening very soon – in the area of 15-25% hike at the next meeting," he said.
"We believe that even a more gradual hiking cycle – accompanied by hawkish messages and a push to return to orthodoxy in general – might be sufficient to stabilise the lira during the summer, with the help of tourist revenues."
All but one of 13 economists in the poll saw further tightening this year. The median estimate for the policy rate at end-2023 was 30%, with forecasts ranging from 18% to 35%.
Erdogan said last week he had approved the policy steps that new Finance Minister Mehmet Simsek, highly regarded by financial markets, will take with the central bank, suggesting he has given the green light to rate hikes.
Ratings agency Moody's said on Tuesday proof that Turkey has shifted towards more orthodox and predictable economic policymaking would be "unequivocally credit positive".
But Erdogan also said his views on interest rates have not changed, and the goal is to ultimately lower inflation, as well as rates, to single digits. Erdogan frequently espouses the maverick view that high rates stoke inflation.
Some analysts noted previous examples where Erdogan returned to orthodoxy only to change his mind. He named Naci Agbal as central bank governor in Nov. 2020 but, after some sharp rate hikes, replaced him less than five months later.
One banker, who requested anonymity, said the fact that Simsek has not brought in any new Monetary Policy Committee members except Erkan shows he "has little room to manoeuvre."
The central bank is scheduled to announce its rate decision at 1100 GMT on Thursday.
(Reporting by Ali Kucukgocmen; Additional reporting by Marc Jones and Jonathan Spicer; Editing by Daren Butler and Christina Fincher)