Turkey’s central bank is expected to keep its benchmark policy rate unchanged this week, according to surveys.
The Central Bank of the Republic of Turkey (CBRT) had brought down the one-week repo rate by 500 points since September to 14% but paused the easing cycle in its first policy-setting meeting of the year last month.
All 20 economists in the Reuters poll predicted the bank would leave its benchmark rate unchanged.
With real yields in deeply negative territory, the rate cuts triggered a depreciation in the Turkish lira, which declined 44% against the United States dollar last year. This prompted price hikes on a range of goods in the import-reliant economy.
To ease strains from soaring inflation, Turkey has lowered the value-added tax (VAT) on basic food items – including water, eggs, dairy products, coffee, tea, fruits and vegetables – to 1% from 8% as of Monday.
Official data for January showed consumer prices rose by 48.69% annually, a 20-year high. Food and nonalcoholic beverages inflation topped 55%. The government has pledged to act and vowed to safeguard households against soaring prices.
The new tax cut should decrease overall inflation by 1.5 percentage points in two months, Reuters cited calculations by three economists. The reduction is expected to trim about TL 25 billion-TL 35 billion ($1.8 billion-$2.6 billion) from Turkey’s budget.
The lira has been broadly stable since the start of the year. The currency closed last week at 13.49 against the dollar. It traded at 13.65 at 2 p.m. local time (11 a.m. GMT) on Tuesday.
The government has embraced a model based on lower borrowing costs, saying credit, exports and investment will help the country weather inflation.
President Recep Tayyip Erdoğan has said the new economic path will also eventually help Turkey solve its chronic current account deficit problem and contribute to stabilizing the Turkish lira.
The central bank, which has doubled its end-2022 inflation forecast to 23.2%, said price stability will be achieved by increasing the lira’s share in the financial system. It also said policy tools will be used to priorities the local currency.
Economists predict inflation will peak around 55% in May due to energy price hikes and salary increases. Treasury and Finance Minister Nureddin Nebati said he expected inflation to peak below 50% in April.
He last week said the inflation would fall to around 24% by December and hit single digits by the time presidential and parliamentary elections set for mid-2023 are held.
Based on nine predictions, the poll’s median forecast for the year-end policy rate was 14%, with estimates ranging from 9% to 14%.
The central bank will announce its rate decision on Thursday.
