As Türkiye grapples with soaring inflation, the country’s central bank is expected to maintain its key interest rate at 45 percent in its upcoming interest rate decision on March 21. This would mark the second consecutive month of stability. However, the consensus among economists suggests that further rate hikes may be on the horizon later this year, underscoring concerns over inflationary pressures.
Tightening monetary policy
In recent months, Türkiye’s central bank has taken proactive measures to tighten monetary policy. This includes adjusting reserve requirements and increasing the maximum interest rate on credit card cash withdrawals. These actions have prompted some banks to either reduce loan limits or stop offering loans.
Despite expectations for a stable interest rate this month, eight out of 12 economists anticipate additional rate hikes in Türkiye later in the year, according to a Reuters poll. Moreover, 20 out of 22 respondents expected the bank to keep its policy rate unchanged in March. Meanwhile, two forecasted a 250 basis-point hike. In February’s poll, economists expected 500 to 750 basis points of policy interest rate cuts by the end of the year.
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Shifting economic sentiments
The sentiment towards Türkiye’s economic outlook has undergone a notable shift recently as the market awaits the interest rate decision. Finance Minister Mehmet Simsek has pledged tighter fiscal policies to complement the central bank’s efforts in reducing inflation. Simsek recently emphasized the importance of additional fiscal measures in aligning with the central bank’s inflation targets. He reiterated the government’s commitment to taking necessary actions to tackle inflationary challenges, signaling a coordinated approach between monetary and fiscal authorities.
Capital Economics stated in a research note that the disinflation process in Türkiye has eased and the risk of a new interest rate hike cycle is growing. However, with elections taking place at the end of March, it is unlikely for the central bank to increase interest rates. On the other hand, Goldman Sachs expects Türkiye’s central bank to hike interest rates by 250 basis points this week, citing rising pressure on reserves and the Turkish lira.
Last week, the central bank’s monthly survey of market participants’ expectations revealed that Türkiye’s year-end annual inflation is anticipated to soar to 44.19 percent, surpassing the bank’s forecast of 36 percent.
