Turkey's central bank to hike policy rate to 15pc in first meeting under Agbal

ISTANBUL: Turkey's central bank is expected to raise its policy rate sharply to 15% this week from 10.25%, a Reuters poll showed on Tuesday, unchanged from last week as more economists predicted the bank would tighten policy through an orthodox channel.

The rate decision will be crucial for the lira which was down some 30% at one point this year due to a sell-off accelerated by the decision to keep the policy rate unchanged in October.

Under the former governor Murat Uysal, the central bank had tightened policy since July mainly via backdoor measures as it faced a declining lira and inflation stuck around 12%. It had raised its one-week repo rate once by 200 basis points since then.

Earlier this month, President Tayyip Erdogan replaced Uysal with Naci Agbal, seen as a capable technocrat who takes a more orthodox approach to policy.

In the first meeting under Agbal on Thursday, the central bank is expected to hike its policy rate to 15%, according to the median forecast of 21 economists in the Reuters poll.

While all economists forecast a rate hike, the estimates ranged between hikes to 12.25% and 16%.

A rise to 15% in the policy rate would in effect be a limited tightening since the weighted average cost of funding has risen to 14.64% due to the backdoor measures.

Still, analysts say an outright hike would signal the bank is serious about bringing inflation down to single figures.

The lira's decline is the most important factor for the rise in inflation, therefore steps need to be taken to stabilise the currency, said Enver Erkan, economist at Tera Yatirim.

"The market will expect the new central bank administration to be able to take the necessary policy steps where it is necessary, on a very plain, simple basis, without indirect moves," he said.

LIRA RALLY

A rate hike could stall the economy's rebound from coronavirus fallout that brought a near 10% contraction in the second quarter. But it could help avert broader balance of payments problems by boosting the lira, the worst performer in emerging markets this year.

The currency rallied as much as 12% last week after the leadership overhaul - which included a new finance minister - and after Erdogan struck a more market-friendly tone and pledged a new economic growth strategy.

Even "bitter" policies would be implemented, he said, which analysts took to mean he would back a big policy tightening. It also eased longstanding concerns about political interference in monetary policy and his past calls for lower rates.

The median of 10 economists for the policy rate at year-end stood at 15.25%, with estimates ranging between 16.25% and 14.25%.

The central bank is expected to announce its policy rate decision at 1100 GMT on Nov. 19.