Turkey expected to hike rates in new test for central bank

ANKARA: The Turkish central bank is expected to lift interest rates yesterday to combat the plunge in value of the lira and rampant inflation, with markets seeing the magnitude of the hike as a critical test of the bank’s credibility.

Turkey has in recent weeks been battling through one of the most troubled periods for its economy under the rule of President Recep Tayyip Erdogan, with the lira battered on currency markets in August.

But the bank has not touched interest rates since early June with markets concerned that the policy of the nominally independent bank is being dictated by Erdogan, who has denounced interest rates as the “mother and father of all evil”.

However after inflation came in at close to 18 per cent in August, the bank on September 3 gave a clear indication that it was set to raise rates, saying the inflation outlook indicated “significant risks” and vowing the “monetary stance will be adjusted” at Thursday’s meeting.

The bank also has to balance concerns over slipping growth, which, although a robust 5.2 per cent in the second quarter on an annual comparison, showed signs of weakness with some analysts predicting Turkey is heading for recession.

Nora Neuteboom, an economist at ABN Amro, said the bank’s statement indicated a rate rise of around 200 to 250 basis points (2.0 to 2.5 percentage points) was to be expected but no more.

“We do not foresee an ‘Argentina scenario’ of an aggressive hike, that would go against the monetary policy that Turkey, so far, has practised,” she told AFP, referring to the Argentinian central bank’s recent hike to a world-high of 60 per cent.

But Neuteboom said markets would be “disappointed” with a 200-250 basis points hike, adding she expected “further lira weakness ahead” and the lira reaching 8.2 against the US dollar by the end of the year.

Anthony Skinner, director of Middle East and North Africa at Verisk Maplecroft, said his base scenario was for a hike of 200300 basis points and predicted the bank would fall short of appeasing those who wanted a hike of 500 basis points.

“Economists and investors are clamouring for the central bank to engage in an aggressive rate hike but they are more likely than not to be disappointed,” he said.