Türkiye’s central bank is forecast to continue its monetary tightening drive and deliver another hefty interest rate hike this week, according to surveys, in what would follow a sharp increase in August and President Recep Tayyip Erdoğan’s strongest backing yet.
Last month, the Central Bank of the Republic of Türkiye (CBRT) shocked with a 750-point hike that lifted the key one-week repo rate to 25% from 17.5%. The decision was seen to signal a new determination to battle stubborn inflation.
Rates rose three times more than expected and sparked the biggest single-day Turkish lira rally since 2021.
The key rate is rising to 30% at this Thursday’s Monetary Policy Committee (MPC) meeting, according to the median response of 16 institutions in a Reuters poll, with forecasts ranging from 27.5% to 31%.
Most analysts surveyed by Bloomberg also see the CBRT raising the benchmark policy rate to 30%.
Ahead of the meeting, Barclays Plc said it expects an increase of 250 basis points or half the size projected by JPMorgan and Morgan Stanley.
Two weeks after the August rate hike, Erdoğan said tight monetary policy would help bring down inflation, which rose to near 59% last month. It had reached a 24-year high of 85.5% last October and stood at 47.83% this July after regressing to as low as 38.21% in June.
Erdoğan is known as a proponent of lower borrowing costs but said that inflation would fall to single digits with the support of tight monetary policy, marking his strongest pledge of support for his new economic team’s policy overhaul.
After winning reelection in May, Erdoğan named a new Cabinet, including two accomplished bankers, who have launched aggressive interest rate hikes in a bid to tackle the country’s long-term inflation issue.
Rates have since risen by 1,650 basis points and CBRT Governor Hafize Gaye Erkan has promised more tightening, given her central bank expects inflation to rise until about May next year.
The central bank has said inflation would likely rise to near 62% by year-end, higher than the upper band of its forecast.
Based on the Reuters poll, economists expect continued monetary tightening to lift the policy rate to 35% by year-end, according to the median, with forecasts ranging between 30% and 40%.
The tightening cycle so far "indicates a commitment to stabilizing the economy via monetary policy," Farooq Pasha, economist at Standard Chartered, said in a client note, predicting a 500-point hike this week.
"We expect this prudent approach to continue amid rising price pressures from domestic and external headwinds."
Unveiling its new medium-term economic plan earlier this month, the government lifted its year-end inflation forecast to 65% and trimmed economic growth forecasts.
Last week, Erdoğan acknowledged the upcoming difficulties and said he hoped to see a "very clear" drop in inflation in 12 months, given that "it will take some time" for economic policies to take effect.