On Thursday, Turkey’s central bank maintained its key interest rate steady for the second month in a row, as President Recep Tayyip Erdogan’s government tries to limit price increases that threaten his two-decade rule.
All 22 analysts polled by Bloomberg expected the Monetary Policy Committee to keep its one-week repo rate at 14 percent. Last month, Turkish inflation reached 48.7%, sending the country’s inflation-adjusted yield to nearly -35 percent, the lowest among emerging market peers.
Erdogan remarked just before the decision on Thursday that “the dispute over interest rates has dropped greatly and exchange rates have stabilised.” “Now is the time to return inflation to single digits,” he remarked.
Turkey’s strong rate cuts in late 2021 triggered a currency depreciation, leaving the country more vulnerable to recent global price shocks than rivals. Erdogan is putting growth first at a time when many of his developing market colleagues are tightening monetary policy to combat price increases, arguing – according to conventional wisdom – that higher borrowing costs feed inflation.
The decision is a compromise between the government’s stance on low rates and the economy’s need for tightening. We expect the main policy rate to remain steady this year, as rises are politically unfeasible. To achieve the competing goals of stabilising the lira and stimulating the economy, the CBRT may use other instruments.
— Selva Bahar Baziki, Bloomberg Economics Turkey and Sweden Economist
Authorities, constrained in by the president’s demands, have shifted their focus away from rates. In order to stabilise the currency, the central bank created incentives for a new savings programme, while the government lowered the value-added tax on staple foods.
Inflation will gradually slow this year, according to Treasury and Finance Minister Nureddin Nebati, as the economy attracts more dollar inflows from tourism over the summer. According to the central bank’s February survey of market participants, inflation forecasts for the end of the year increased to 34.06 percent from 29.75 percent.
In the run-up to the 2023 national elections, rising living costs are already eroding Erdogan’s electoral support.
On February 28, Turkey’s Statistical Institute will release GDP data for the fourth quarter and the entire year of 2021. On March 3, it will release February inflation numbers.
