Conventional wisdom suggests Turkey’s central bank will drastically increase lending rates when its monetary policy board convenes later today. Inflation has ballooned and the lira has competed with Argentina’s peso as the worst-performing emerging-market currency this year.
But conventional wisdom has not met Recep Tayyip Erdogan. Since his recent re-election Turkey’s strongman has pressured the bank to keep monetary policy loose, despite the cost to the currency. In the three months since the last increase, the Turkish lira has shed nearly a third of its value. At the start of September, just hours after the latest inflation figures (an annualised 17.9%) were announced, the bank suggested that tightening was back on the agenda.
Analysts say only a rise of several percentage points can salvage its tattered credibility and the value of the lira. Understanding what the bank needs to do is the easy part. Predicting whether it will is harder than ever.
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