MNI INTERVIEW: CBRT Keen To Avoid Hike, Government Row-Yalcin

The Central Bank of Turkey is likely to adjust macroprudential tools or raise short-term rates rather than increase its key policy rate this week in order to avoid a conflict with the government, a leading expert on the country's economy told MNI.

While policy credibility would benefit from a hike on Thursday, given the impact on inflation expectations and market confidence of the jailing of Istanbul Mayor Ekrem Imamoglu, such a move would deviate from “the historical path we can observe and the desire to maintain independence, rather than entering into a potentially massive confrontation with the government,” said Erdal Yalcin said, professor of International Economics at Germany's HTWG Konstanz.

The CBRT may use other tools - as at its March 27 interim meeting -  to tighten monetary policy while leaving the 1W Repo Rate at 42.5%, Yalcin said in an interview.

“I think the CBRT will be reluctant to raise interest rates, and there is good reason not to in light of the political demonstrations and the boycotts that we have observed since the imprisonment of Imamoglu,” he said.

“The big issue at the moment is keeping Turkish investments and rollovers within the country, including for those big companies closer to the government in the building and infrastructure sectors. Raising rates would only hit those who are already under pressure.”

Most analysts predict no rate change on Thursday, though some point to the more hawkish tone of recent CBRT communications, arguing the chances of a hike of up to 350bps have increased given uncertainty caused by U.S. trade policy.

“They may choose something in-between - instead of the predicted 350bp, they will adjust short-term overnight interest rates, as they did last month when the public demonstrations started, raising it from 44% to 46% and at the same time leaving the policy rate untouched,” Yalcin said.

LIRA DEFENCE

The lira’s slide to nearly 43 to the dollar forced the CBRT to spend billions of dollars in its defence. With the currency now stable at around 38, it must rebuild dollar reserves in anticipation of further threats.

Politics will be key, Yalcin said. Turkey hoped to keep its current account deficit at around USD20-25 billion this year, but data from the first two months of 2025 suggests USD 30-40 billion is more realistic - adding a financial element to Ankara’s attempts to deepen relationships with regional governments.

“What is going on at the moment in northern Syria is very important, because Turkey is creating alliances with Iraq, with the Gulf states, and we know already from the last five years that when the central bank was in need of money, these countries supported Turkey. So there is an additional political dimension via the government's role in supporting the central bank’s ability to intervene to defend the lira with the help of oil-rich states.”

The CBRT will also want to protect growth, which analysts expected at between 2.6-3.5% at the beginning of 2025, versus a government target of 4.0%.

With the decline in inflation expected to reverse in April, Yalcin said the CBRT might consider it a “reasonable step” to increase its 24% annual inflation target, as it did in February, to support output. (See MNI INTERVIEW: Top End of CBRT Target Range In View - Ex-DG)

FED KEY

Yet tariff uncertainty means Federal Reserve policy has greater relevance for emerging markets, he added, leaving the CBRT in a bind.

“If and when the Fed does start to raise interest rates, then the pressure to follow suit in countries like Turkey or Brazil will be completely different. The Turkish government will also then have basically to roll over Treasuries in light of the change of U.S. interest rates, so the shock wave will hit Turkey again even if the Fed acts in a rational way.”

Turkey’s relatively low proposed U.S. tariffs of 10% will make it more attractive to foreign firms, and strengthen its hand in trade talks with the European Union, Yalcin said.

But Europe will have to recalibrate expectations of Turkey’s political and legal systems if it is to gain the benefits on offer.

“Take the customs union, for example - there are still unclear areas. How do we handle Turkish-made Chinese cars with imported Chinese batteries, and so on? These questions need to be clarified, in the interest of both Turkey and Europe, so that trade can flourish for the benefit of both sides,” Yalcin said.

“While the political concerns are legitimate, too much pressure risks undermining stability and cooperation. The trade-off we need to keep in mind is that Europe now faces a different set of risks. And I believe Europe has realized this - that’s why we see rhetorical reactions to political developments in Turkey, but no substantial political action.”