Turkey extends the pause on its repo rates

Turkey keeps its benchmark interest rate unchanged for the third month in a row. The Federal Reserve's tightening and rising inflation are testing the management and determination of Recep Tayyip Erdogan, Turkey's president. For its part, the Monetary Policy Committee maintains the one-week repo rate at 14%.

Erdogan defines himself as an "enemy" of interest rates, which leads him to prioritise export-led growth. The country's inflation is above 54%, driven by high energy costs since Russia began its "special military operation" in Ukraine. 

Added to this is the considerable decline in the value of the lira, which now exceeds 15 to the dollar. Moreover, the Turkish currency has depreciated to 17.55 per euro. This puts Turkey at a considerable distance from the United States. The world's largest economy raised its rates by 0.25 % last Wednesday.

"Instead of raising rates as the Polish and Hungarian central banks have done in response to the inflationary shock caused by the war in Ukraine, the CBRT chose to keep its policy stance unchanged," says Piotr Matyrs, an analyst at InTouch Capital Markets Ltd, a financial markets adviser based in London and New York. 

The decision by the Central Bank of the Republic of Turkey highlights its stance close to the president's views on monetary policy and inflation. Erdogan has an unconventional view that higher interest rates make the economy more expensive. 

The CBRT defends itself by claiming that it is keeping borrowing costs constant "because inflation was being fuelled by the war and would ease once the conflict ended", as reported by US financial news company Bloomberg. 

A major change adopted by the Turkish bank was the removal of all references to a current account surplus target later this year. The Eurasian territory focuses almost all of its economy on exports, but rising commodity costs have widened its foreign trade gap.

Ankara's debt is already at negative 40.4%. As a result, the pressure on its currency is increasing unchecked despite attempts to stabilise it. At the beginning of the year, the lira was down almost 10% against the dollar. Now, it is extending losses to trade 1.1% lower.

"We believe market conditions will be tough enough to lead the central bank to tighten policy," notes Enver Erkan, chief economist at Tera Yatirim. The Turkish Statistical Institute will publish March inflation data next April, when the country's next rate and tax decisions are scheduled to be made. 

With new general elections due to take place in June 2023, every decision Erdogan makes will determine his success or failure. He and his party are focusing their efforts on not leaving the Turkish people in the hands of the opposition. The president's supporters believe that his government has brought only benefits, as they have focused on a policy of work and service.

However, opposition leader Meral Aksener argues that "this monstrous system" can no longer be endured, adding that the nation will "at the next opportunity of the ballot box, teach the owners of this corrupt order a very hard lesson" and that "the sun will rise again for the country". The opposition also calls for a system where the rights and freedoms of all citizens are guaranteed.