Turkish central bank holds rate at 14% despite inflation fears

Turkey’s central bank held its policy rate at 14% for a fourth consecutive month on Thursday as expected, even as inflation is predicted to exceed 70% after Russia’s invasion of Ukraine sent energy prices soaring.The bank cut its policy rate by 500 basis points at the end of last year as inflation rose.The easing cycle sparked a currency crisis that saw the lira end the year down 44% against the dollar, stoking prices.The recent rise in inflation has been driven by energy costs, supply shocks, food prices and temporary rise in prices “that are not supported by economic fundamentals,” the bank said.“The committee expects the disinflation process to start on the back of measures taken...along with the decline in inflation owing to the base effect and the resolution of the ongoing regional conflict,” it added.Credit growth, including selective loans for the real economy, is important for financial stability, the bank said, adding that it had decided to strengthen macroprudential policies.Sahap Kavcioglu, the central bank’s governor, told exporters this week that the bank is considering raising the share of foreign currency revenues that they are required to sell to the bank to 40% from 25%, two sources told Reuters.Inflation rose to 61% in March and is expected to top 70% in coming months, due largely to the lira crisis, economists say.War-related sanctions on Russia, meanwhile, have sent gas and oil prices soaring, lifting prices for import-dependent Turkey.The surge in prices after years of double-digit inflation have rattled households and eroded savings.All 18 economists in a Reuters poll predicted the bank would hold rates this week.Some predicted it would have to hike before the end of the year given continued pressure on the lira, rising inflation and tightening by other central banks.Jakob Christensen, head of emerging market research at Danske Bank, said the pressure on emerging markets is expected to grow as the US Federal Reserve hikes rates in coming months.“While they may be able to hold on to this new stability in the lira (for now), I think there will come a time when the pressure gets big again because of the high US interest rates and the hit to global growth,” he said. “While the share of sustainable components in the composition of growth is increasing, the risks arising from energy prices in the current account balance continue,” the bank said.A sustainable current account balance is important for price stability, it added.