Reuters poll expects Turkish central bank to hike interest rate to 20 pct

Reuters

Turkey's central bank is expected to raise its policy rate to 20% this week, a Reuters poll showed on Aug. 21, though some economists expect a smaller increase after hikes in previous months remained below expectations.

The central bank embarked on a tightening cycle in June, after President Recep Tayyip Erdoğan appointed former Wall Street banker Hafize Gaye Erkan as governor.

As part of the policy pivot, the bank has tightened its one-week repo rate by 900 basis points, raising it from 8.5% to 17.5%, still far below annual inflation at 47.83%.

It has promised to gradually tighten policy further as necessary to avoid the negative impact of high rates on the economy.

The median estimate of 17 institutions in the Reuters poll was for a 250-basis-point hike in the policy rate to 20%, with forecasts ranging from 18% to 20.50%.

"Durable disinflation is unlikely in an environment where the real policy rate is set to remain deeply negative, even if modest policy rate hikes are complemented by macro-prudential tightening," HSBC said in a note.

It predicted that the policy rate will rise to 30% by December, but added that risks were still tilted towards a lower terminal policy rate.

The bank has also begun to simplify macro-prudential measures - tools to ensure the financial system's stability - implemented under the former governor, and has supported the rate hikes with qualitative and selective credit tightening. This weekend, it began rolling back a costly scheme that protects lira deposits against forex depreciation.

The bank sees annual inflation at 58% at the end of the year, due to the lira's depreciation as well as various tax hikes Ankara recently introduced.

Economists expect the bank to continue to hike rates, and see the policy rate at 25% by year end, according to the median estimate of seven economists, with forecasts ranging between 20% and 30%.

The central bank will announce its rate decision at 11.00 GMT on Aug. 24.

Economy team will bring inflation down to single digits, Erdoğan says

"Turkey's economy team is capable of bringing down inflation to single digits," President Erdoğan an told reporters during his flight back from Hungary on Aug. 20.

According to a readout of his response to questions, Erdoğan also said his government had enabled a fall in inflation to single digits in the past, and Turks should have faith in his Justice and Development Party (AKP) to do it again.