Turkey rate hike seen as political test for Erdogan

Analysts and opposition lawmakers say central bank’s widely expected interest rate hike is test for both fragile economy, and Turkish President's ability to steer it along new course.

Central bank meets; poll forecasts 475 bps key rate hike

Economy's problems have eroded Erdogan's support base

ISTANBUL - Turkey's central bank is widely expected to hike rates on Thursday in what analysts and opposition lawmakers say is a test for both the fragile economy, and for President Tayyip Erdogan's ability to steer it along a new course.

Over just five days last week, Erdogan ousted the central bank's chief; watched his son-in-law and finance minister Berat Albayrak abruptly resign; and then - in a speech to the nation - pledged a market-friendly growth strategy under the new appointments.

The lira soared 12% in response and has since held steady.

Economists, hopeful the central bank will be freer of political pressure under new Governor Naci Agbal, predicted in a Reuters poll the policy interest rate would rise by 475 points in an announcement set for 1100 GMT.

Such tightening could stall the economy's recovery from the coronavirus pandemic, but also address this year's currency slump to record lows and inflation that is stuck in double-digits.

Whether the market's lofty expectations are met will begin to answer a key question in Turkish politics: is Erdogan willing to accept the high interest rates he has long railed against.

In his speech, Erdogan said that even "bitter" policies would be adopted to rebuild reserves and embrace international investors.

Polls show the economy's problems, including two sharp contractions in as many years, have eroded support for Erdogan's ruling alliance. One published this week by Turkiye Raporu shows it fell to 47%, dropping for the first time below the combined opposition.

"The leadership shake-up happened amidst such a development to stop the bleeding," said Can Selcuki, the poll's editor and general manager of parent consultancy Istanbul Economics.

Members of Erdogan's AKP party said he had been shocked by Albayrak's resignation, which however also gives him an opportunity to ease internal tensions and rebuild public trust in management of the economy.

Dwindling confidence in the lira has prompted Turks to snap up around $30 billion in hard currencies so far this year to a record $224 billion in total holdings.


Costly state interventions in FX markets and a related plunge in the central bank's foreign reserves have also driven the lira selloff.

Erdogan has long blamed high rates for inflation and foreigners for their role in halving the lira's value in less than three years, and opposition lawmakers criticised last week's sharp rhetorical pivot.

"Mr. Erdogan ... you approved the high interest rate hike for (Thursday), but the market will demand more each time due to your wrong policies," Meral Aksener, leader of the opposition Iyi Party, said on Wednesday.

"The markets brought Erdogan and his team to their knees."

In 2018 as a shock currency crisis hit, Erdogan similarly bowed to market orthodoxy as rates soared to 24%. Yet in 2019 he ousted the central bank chief for not cutting rates aggressively.

The policy rate is now 10.25% and inflation is near 12%, leaving negative real rates for local depositors. But tightening measures since July have raised the average cost of funding to 14.8%, teeing up a formal rate hike.

Tatiana Lysenko, global EM economist at S&P Global Ratings, said the leadership changes have left many investors optimistic.

"But we are yet to see whether this is a broader strategy to return to more conventional and transparent macroeconomic policies," she said.