Turkey’s central bank keeps rate at 14% despite rising inflation

A logo of the Central Bank of Turkey is pictured at the entrance to its headquarters in Ankara, Turkey, October 15, 2021. REUTERS/Cagla Gurdogan

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ISTANBUL, Feb 17 (Reuters) – Turkey’s central bank kept its key rate at 14% for the second consecutive month on Thursday as expected, despite a jump in inflation to nearly 50% after the easing cycle of the last year triggered a currency crisis.

The bank began easing in September and cut interest rates by 500 basis points under pressure from President Tayyip Erdogan, whose unorthodox new economic plan prioritizes credit, production, exports and employment. Read more

All 20 economists in a Reuters poll predicted the benchmark rate (TRINT=ECI) would remain unchanged after the bank previously signaled it would pause the easing cycle to monitor its effects as it proceeds to a review of its policy. Read more

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“The comprehensive review of the policy framework is underway with the aim of encouraging an ongoing reading of all policy tools,” the bank’s monetary policy committee said.

Reuters Charts

DISINFLATION PROCESS?

After the decision, the lira remained virtually flat and was slightly lower at 13.62 against the dollar at 11:41 GMT.

The lira fell 44% in 2021 on fears of premature easing, but has remained stable this year, after costly state interventions in the currency market and a program to protect lira deposits against forex depreciation.

Longer-dated Turkish dollar-denominated sovereign bonds were under pressure on Thursday with the 2045 issue down 0.5 cents to trade at 83.36 cents to the dollar, according to Tradeweb data.

Annual inflation hit a 20-year high of 48.69% in January, leaving real yields in deep negative territory, which is a wake-up call for investors and a vulnerability for the lira.

However, the central bank expects inflation to decline as the year progresses.

“The Committee expects a process of disinflation to set in motion thanks to the decisive measures taken and pursued for lasting price and financial stability,” the bank said.

Most economists predict that inflation will exceed 50% in the coming months and will remain near that level for much of the year, especially if the central bank starts to ease again.

Last month, the central bank doubled its inflation forecast for the end of 2022 to 23.2%, but Governor Sahap Kavcioglu at the time dismissed the idea that the unorthodox rate cuts had fueled inflation and the fall of the lira. Read more

Erdogan’s government hopes Turks will bear the soaring cost of living for a few more months before some relief from inflation arrives and tourists arrive, helping the economy out of its doldrums. winter misfortunes. Read more

In recent years, Erdogan has rapidly reshuffled the bank’s leadership with like-minded officials, undermining its credibility as an independent institution.

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Additional reporting by Tuvan Gumrukcu and Can Sezer Writing by Daren Butler Editing by Jonathan Spicer

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