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Turkey Keeps Key Rate Unchanged as Inflation Backlash Builds -Breaking

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© Reuters. Turkey’s key rate remains unchanged as inflation backlash grows

(Bloomberg) — Turkey’s central bank kept its benchmark interest rate unchanged for a second month on Thursday, as President Recep Tayyip Erdogan’s government struggles to contain price surges that could threaten his two-decade rule.  

As predicted by Bloomberg’s 22 analysts, the Monetary Policy Committee kept its forecast at 14%. Turkish inflation climbed to 48.7% last month, pushing the nation’s yield when adjusted for inflation to almost -35%, the lowest by far among emerging market peers.

At 2:01 p.m., the dollar was 0.2% less and traded at 13.6230 USD.

Turkey’s aggressive rate cuts in late 2021 fueled a collapse in the lira, leaving the nation more exposed than peers to recent global price shocks. Erdogan prioritises growth when many of his peers from emerging markets tighten monetary policy in an effort to offset price gains. He also believes that rising borrowing costs are fueling inflation, a break with economic orthodoxy.

Boxed in by Erdogan’s demands, authorities have switched their focus away from rates. Incentives were provided by the central bank to help stabilize the currency. The government also reduced value-added tax for staple foods to try to limit price increases. 

Treasury and Finance Minister Nureddin Nebati predict that inflation will slowly slow in this year, as more tourists bring dollars into the country. Inflation expectations for the end of the year jumped to 34.06% from 29.75%, according to the central bank’s February survey of market participants.

Rising living costs are already sapping Erdogan’s political support ahead of 2023 national elections.

The central bank’s steps to protect lira deposits and the government’s tax cuts aren’t sufficient to fight inflation, Deutsche Bank economist Fatih Akcelik said before the rate decision. “We maintain our view that the markets will force the central bank to hike its policy rate at some point this year,” he said.

Turkey’s Statistical Institute will publish gross domestic product data for the fourth quarter of 2021 and the full year on Feb. 28. On March 3, it will release February inflation data.

©2022 Bloomberg L.P.

 

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