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Turkey's new-look cenbank to hike rates 475 points to 15%: Reuters poll

ISTANBUL (Reuters) - Turkey’s central bank is expected to sharply raise its policy rate to 15% from 10.25% next week, a Reuters poll showed on Thursday, after President Tayyip Erdogan surprised markets by replacing the bank’s chief and hailing a new economic strategy.

FILE PHOTO: A logo of Turkey's Central Bank (TCMB) is pictured at the entrance of the bank's headquarters in Ankara, Turkey April 19, 2015. REUTERS/Umit Bektas

The median estimate in the poll of 13 economists indicated a hike of 475 basis points to the one-week repo rate TRINT=ECI. All forecasts predicted monetary tightening, ranging from hikes of 400 points to 575 points.

Analysts say higher rates would boost the lira which has touched record lows this month, and begin to bring down inflation that has been stuck near 12% all year despite fallout from the coronavirus pandemic.

Under former governor Murat Uysal, the central bank had mainly used backdoor measures since July to tighten credit. It hiked the key rate 200 points in September but held it steady last month, setting off the latest currency selloff.

Erdogan sacked Uysal over the weekend and installed former finance minister Naci Agbal, seen as a capable technocrat who takes an orthodox approach to policy.

A rate hike could stall the economy’s rebound from coronavirus fallout that brought a near 10% contraction in the second quarter. But it could help avert broader balance of payments problems by boosting the lira, the worst performer in emerging markets this year.

BITTER PILL

Yet the currency has rallied this week after the leadership overhaul - which included a new finance minister - and after Erdogan struck a more market-friendly tone and pledged a new economic growth strategy.

Even “bitter” policies would be implemented, he said, which analysts took to mean he would back a big policy tightening. It also eased longstanding concerns about political interference in monetary policy and his past calls for lower rates.

“The endorsement of the more market friendly stance on reforms as well as inflation from the President himself can essentially be seen as a green light to embark on a reformation of the Turkish economy,” said Deutsche Bank in a note.

A rise to 15% in the policy rate would in effect be a limited tightening since the weighted average cost of funding CBTWACF= has risen to 14.36% due to the backdoor measures. Still, analysts say an outright hike would signal the bank is serious about hitting its target inflation range around 5%.

In his first comments as governor, Agbal said the bank’s “main goal” is to achieve and maintain price stability and that it will “decisively” use all policy tools to do so.

Investors and depositors have dumped the lira this year in part due to negative real onshore rates.

The central bank is expected to announce its policy rate decision at 1100 GMT on Nov. 19. Reuters will publish an updated story on the poll as more forecasts are submitted.

Additional reporting by Karin Strohecker in London; Editing by Jonathan Spicer

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