On a downtrend: A money changer holds Turkish lira banknotes at a currency exchange office in Ankara. The lira is the worst performer in emerging markets this year with a loss of more than 23% against the dollar. — Reuters
ISTANBUL: Turkey will likely not deviate from its maverick approach of keeping interest rates deeply below zero when adjusted for inflation even as prices surge, breaking with central banks embarking on what may prove to be the most aggressive tightening of monetary policy since the 1980s.
A pause by the Turkish central bank since it ended a round of rate cuts last year has put added strain on the lira and touched off a surge in consumer prices that Goldman Sachs Group Inc estimates will soon reach 80%.
But economists are near unanimous that policy makers will keep their benchmark at 14%.
In a Bloomberg poll of 26 analysts, a lone dissenter predicted a cut of one percentage point, with the rest seeing no change.
“I can’t even imagine where we will end up if current policies continue for another 12 months,” said Hakan Kara, the former chief economist of Turkey’s central bank.
“If we go on like this, we can’t come out of this situation without foreign support,” said Kara, who’s now an economics professor at Bilkent University in Ankara.
The insistence on unprecedentedly loose monetary policy will leave Turkish assets even more vulnerable as domestic price pressures build further and the European Central Bank prepares to join peers by starting to raise rates soon.
The lira is the worst performer in emerging markets this year with a loss of more than 23% against the dollar.
But pressure from President Recep Tayyip Erdogan to keep rates low means hikes are off the table for Turkish central bank governor Sahap Kavcioglu.
Instead, policy makers have deployed measures to curb credit growth and make the lira more appealing to savers while trying to rebuild their reserves.
Bloomberg Economics says the central bank has recently tightened using alternative tools such as reserve requirements.
“But in the absence of a higher policy rate, these steps did not anchor inflation expectations, have lasting impact on consumer prices or shore up the lira.” — Bloomberg
