Turkey central bank may surprise again with bigger rate hike - analysts

Turkey’s central bank may increase its benchmark interest rate by more than economists expect for a second month in October, said Cüneyt Paksoy, a strategist employed by the state-run Anadolu news agency.

The central bank understands that tighter monetary policy is needed to tackle inflation, to improve Turkey’s so-called risk premium and to attract capital back into the Turkish lira, Paksoy said in comments published by Anadolu on Tuesday.

Economists expect the bank to increase the benchmark interest rate by between 100 basis points, or 1 percentage point, and 200 basis points, at a meeting on Thursday from 10.25 percent, according to a survey published by Anadolu last week. It unexpectedly hiked the rate by 200 basis points in September. A Reuters survey of economists predicts a 175 basis-point hike this month.

The Turkish lira has dropped to successive record lows against the dollar this month, reaching 7.9591 per dollar last week. The lira traded up 0.2 percent at 7.84 per dollar on Wednesday.

Although monetary policymakers may go for a big hike, they will continue to provide help to the government to bolster the outlook for economic growth in the country, Paksoy said. September’s rate increase was the first in two years.

The central bank should increase rates by 300 basis points at this week’s meeting, said İnanç Sözer, founder and CEO of Virtus Glocal Consulting. Such a hike could see the lira strengthen towards the year-end while a more limited increase may see it pass a psychological level at 8 per dollar, he said.

Turkish President Recep Tayyip Erdoğan has called on the central bank to keep interest rates low, claiming that higher borrowing costs are inflationary, a view that contradicts with conventional economic wisdom.

The bank should raise rates by at least 300 basis points because the outlook for inflation is deteriorating and dollarisation in the economy is persisting, putting policymakers in a difficult position, said Ferhat Yükseltürk, a founding partner of Econs Consulting Services in Istanbul.

Inflation in Turkey stood at 11.8 percent in September, unchanged from the previous month.

Expectations for inflation at the end of the year rose to 11.8 percent in a central bank survey of finance industry professionals this month from 11.5 percent in September. The bank raised its forecast for inflation in 2020 to 8.9 percent in July from a previous estimate of 7.4 percent.