MNI CBRT WATCH: Policy Likely On Hold, But More Hikes Expected

The Central Bank of Turkey is expected to keep its policy rate unchanged at 45% for a second month after its meeting on Thursday, with local elections nearing, though a small minority of analysts see a chance that it may be unable to wait as inflation continues to rise and hikes by 250 basis points.

February inflation jumped by almost 3pp to 67.07%, prompting the CBRT to introduce new limits on the growth of lira-denominated commercial and general loans as it strives to tighten conditions without raising rates in a pre-electoral period. It also increased the maximum interest rate on credit card cash withdrawals.

However, while such lines of defence may have bought the bank some time, they may not be enough to anchor inflation expectations. (See MNI INTERVIEW: Turkey QT May Only Delay Rate Hikes- Kara).

The CBRT’s Monetary Policy Committee noted following February’s decision to hold that while recent indicators suggest that domestic demand and consumption have continued to moderate in some areas, they have declined less than projected in others, with services inflation, food prices and geopolitical risks keeping price pressures alive.

Following last month’s decision new Governor Fatih Karahan emphasised that the current interest rate would be maintained for as long as necessary, but with further tightening of the monetary policy stance to be expected "in case a significant and persistent deterioration in inflation outlook is anticipated."

Turkey's Finance Minister Mehmet Simsek has in recent days pledged to tighten fiscal policy in an effort to support the central bank, with more restrictive moves anticipated following upcoming local polls.

But it remains to be seen whether this will be enough to avoid at least one more hike, with Governor Karahan seen maintaining his overall hawkish tone and willingness to use all the tools at his disposal.