by Burak Akinci

ANKARA, April 1 (Xinhua) -- Türkiye's central bank will need to maintain tighter-than-expected policies for the rest of the year to curb market volatility triggered by the recent political tensions, experts have said.

To address the years-long persistent inflation, which was exacerbated by a 2018 currency crisis and deadly quakes in 2023, policymakers in the country have come up with a series of austerity measures and have managed to lower inflation from over 75 percent in May 2024 to 39 percent in February.

Encouraged by this decline, the central bank started reducing its key lending rate, cutting the policy rate to 42.5 percent with 250-basis-point reductions in December, January, and March, respectively. It has also announced that it will "do whatever it takes" to achieve its 24-percent year-end inflation target.

However, heightened political tensions sparked by the recent arrest of Istanbul Mayor Ekrem Imamoglu have begun to derail such anti-inflation efforts.

Imamoglu, a leading figure in the opposition Republican People's Party, was detained on March 19 and formally arrested and jailed pending trial on March 23 over charges of corruption and terror ties. The incident has prompted violent protests from tens of thousands of Turks and has rattled financial markets and investors.

On March 19, the foreign exchange market went through drastic fluctuations, which saw the Turkish lira plunging at one point by as much as 14.5 percent against the U.S. dollar, although later trading down around 7 percent.

A day later, the central bank pledged to continue selling foreign currency to "prevent potential volatility in exchange rates and maintain foreign exchange liquidity." The bank then raised its overnight lending rate by 200 basis points to 46 percent, in a move to tighten liquidity and counter financial instability.

According to media reports and economists' calculations, the central bank has so far injected some 26 billion dollars worth of foreign currency into the market to support the lira and prevent a severe depreciation.

Türkiye's stock market also felt the impact, with the benchmark BIST-100 Index plunging about 16.5 percent in the week when the detention happened, the worst drop after the 2008 global financial crisis.

To stabilize trading, the capital market regulator has imposed a ban on short-selling for a month to prevent stocks from falling.

U.S.-based investment bank Goldman Sachs recently said Türkiye's central bank may raise its key interest rate by as much as 350 basis points, either during its next Monetary Policy Committee (MPC) meeting on April 17 or even earlier.

The projected rate hike aims to bolster the central bank's credibility and reinforce investor confidence in Türkiye's long-term economic outlook, Goldman Sachs said.

"The central bank may need to halt or even reverse its rate cuts to safeguard the currency and prevent inflation from surging again," Istanbul-based economist Mustafa Sonmez told Xinhua.

The previous expectation by most analysts and banks that a fourth consecutive rate cut could be announced at the upcoming MPC meeting has now changed, Sonmez noted.

Sonmez also warned of a renewed risk of "dollarization," with domestic savers converting their lira deposits into foreign currencies, a trend that has previously strained the Turkish economy.

Arda Tunca, another Istanbul-based economic and financial analyst, believed the central bank will likely pause its rate-cutting trajectory this month.

"The bank is expected to adopt a wait-and-see approach to assess the impact of political turbulence on markets," he told Xinhua.

Tunca considered the 24-percent year-end inflation target too "optimistic" and unlikely to be achieved under the current economic conditions, saying he forecasted a year-end inflation at around 30 percent.

Mahfi Egilmez, former undersecretary of the Treasury, said policymakers should consider reversing the easing cycle with a rate hike at the next MPC meeting.

"I believe the time has come to increase interest rates to counter the impact of financial turbulence on inflation," Egilmez wrote in an article published on the online economic news portal Ekonomim.

"I previously advocated for interest rate reductions, but the situation has changed. Inflation is poised to rise, and we must take measures to prevent it," he said. Enditem

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