Türkiye’s central bank is expected to continue its monetary tightening this week, but at a slower pace compared to previous months, to saddle rising inflation, according to market surveys.
Since June, when President Recep Tayyip Erdoğan appointed former Wall Street banker Hafize Gaye Erkan as its governor, the Central Bank of the Republic of Türkiye (CBRT) has embarked on a 2,650 basis-point tightening cycle – including hikes of 500 basis points in each of the last two months.
The key interest rate is rising by half this week, to 37.5% from 35%, according to the median response of 21 institutions in a Reuters poll. Forecasts ranged from 37.5% to 40%.
Sixteen economists forecast a hike of 250 basis points, while three expected 500. In the middle, one predicted 300 basis points and another predicted 350.
Earlier this month, the central bank again promised gradual monetary tightening to achieve disinflation. It expects inflation to rise from 61.4% last month to peak at 70%-75% in May before dipping to about 36% by the end of next year.
It hit a 24-year peak of 85% last year and surged again in recent months as the Turkish lira weakened after a long easing cycle that has been reversed by the new economy administration appointed after the May elections.
Based on the Reuters poll, economists expect another rate hike in December. According to the median forecast for the end of 2023, the policy rate will be 40%.
Analysts at both Morgan Stanley and Goldman Sachs also predict a slower pace in the central bank’s tightening, foreseeing a 250 basis-point hike in the one-week repo rate.
Considering the policy preference for a moderate adjustment in growth and delays in monetary transmission, Morgan Stanley analysts said the CBRT is likely to slow down its rate hikes and assess the cumulative impact of tightening measures on economic activity and inflation.
"Since August, onshore and offshore rates have started to converge with 3M rates, reaching +40%, our terminal rate forecast for the year. Furthermore, TRY deposit rates resumed their sharp upward trend in the past two weeks," Goldman Sachs said in a note to clients.
"We have argued that such a convergence of market rates was an integral part of returning to a more orthodox and rate-based monetary system, allowing the (central bank) to remove many of the macroprudential measures in place."
Average lira deposit rates of up to three months rose to around 46% as of Nov. 10 from around 15.5% at the beginning of the year, according to central bank data.
The median of nine economists who contributed to the poll showed the policy rate is expected to stand at 35% at the end of next year. The central bank is expected to cut rates in 2024 as inflation falls, according to the poll.
The central bank will announce its rate decision on Thursday.