Central Bank of Turkey keeps interest rate at 14% with inflation at 50%

Turkish lira remains weaker against USD after the Turkish central bank decided to hold its key rate at 14%. USD/TRY is trading at 13.6241, little changed since the decision but up 0.2% on the day. This is the second month in a row that the central bank has kept rates down with a series of rate cuts late last year despite skyrocketing inflation.

The financial regulator, which has been profoundly under pressure to implement President Recep Tayyip Erdogan's unorthodox strategy to cut rates to curb inflation, said it expected disinflation as a result of the measure. “A comprehensive review of the PrEP framework is currently underway to encourage continuous optimization of all policy instruments,” the statement said.

The Monetary Policy Committee left the weekly repo rate at 14%, as predicted by all 22 analysts surveyed by Bloomberg. Inflation in Turkey rose to 48.7% last month, pushing inflation-adjusted national returns to nearly -35%, the lowest among emerging market peers.

Apparently, Turkish Central bank’s moves to protect lira deposits and government tax cuts are not enough to fight inflation, and many Fx analysts hold a view that the markets will force the central bank to raise the key interest rate even further up at some point this year. The Turkish Statistical Institute will release gross domestic product data for Q4 2021 and the full year on February 28 and will publish the accompanying inflation data for the month. We will keep an eye on them.

Turkey's aggressive rate cuts in late 2021 triggered a collapse in the lira, leaving the country more vulnerable than other countries to recent global price shocks. Erdogan sticks to his view of prioritizing growth at a time when many emerging markets are tightening monetary policy to counter rising prices, arguing – in a departure from economic orthodoxy – that higher borrowing costs fuel inflation.

Cornered by Erdogan's demands, the central bank introduced incentives for a new savings scheme to stabilize the currency, while the government cut value-added taxes on staple foods to keep prices down. Erdogan said that the interest rate debate in Turkey “has subsided” as Finance and Treasury Minister Nureddin Nebati predicted that inflation would gradually slow down this year as the economy will receive more dollar revenues from tourism in the summer. Year-end inflation expectations jumped to 34.06% from 29.75%, according to a February survey of market participants by the central bank. The rising cost of living is already undermining Erdogan's political support ahead of the 2023 national elections.