(Bloomberg) -- Turkey’s new central bank governor will lead a policy meeting for the first time on Thursday, bringing a more hawkish tone than his predecessor but with little expectation that interest rates would go any higher for the time being.

Fatih Karahan is taking over after Hafize Gaye Erkan’s abrupt departure earlier this month, with economists at banks including Barclays Plc anticipating tougher guidance as a result. All analysts surveyed by Bloomberg predict the Monetary Policy Committee will pause for the first time since last May and hold its benchmark at 45%.

“The Turkish central bank is likely to keep rates unchanged but communicate a more hawkish rhetoric,” Barclays economists including Ercan Erguzel said in a report.

A former economist at the Federal Reserve Bank of New York and Amazon.com Inc., Karahan was a deputy governor for much of the tightening cycle that lifted rates by 36.5 percentage points with eight straight moves. 

Inside Turkish Central Banker Downfall That Was Months in Making

Karahan inherits an economy where domestic demand is still feeding into inflationary pressures, keeping price growth on track to peak above 70% in a few months. The central bank expects inflation to end 2024 at 36%, a level Deputy Governor Cevdet Akcay called an “ambitious but attainable target.” 

The projected path of inflation has become officials’ preferred measure for gauging the tightness of policy, even as rates remain deeply negative when adjusted for current prices.

What Bloomberg Economics Says...

“Turkey’s central bank will likely hold rates steady while providing hawkish forward guidance at its February meeting. We also expect the central bank to continue revising its banking regulation and alternative tools to tighten financial conditions and deliver steps aimed at draining excess market liquidity”

— Selva Bahar Baziki, economist. Click here to read more. 

By breaking off its cycle of rate hikes, the central bank is counting on the momentum of disinflation it tried to set in motion under Erkan. Karahan’s arrival at the MPC last July, along with the appointment of two other new members, led to a much faster pace of monetary tightening in the months that followed, as part of a shift away from the era of cheap money and unconventional policies.

While Karahan has left open the option of higher rates if the inflation outlook worsens, it’s likely he’ll now turn to alternative tools and regulations, in part to soak up excess lira liquidity that’s been a drag on deposit rates among banks over the past month. 

Possible steps to tighten financial conditions include increased reserve requirements or liquidity bill issuances, according to Bloomberg Economics. 

The recent spike in credit card spending is another concern, with Alpaslan Cakar — head of the Banks Association of Turkey — drawing attention to its “inflationary impact” last month. It’s an issue Cakar said could prompt limits on payment installments or expenditure. 

Under Karahan’s predecessor, the central bank capped the maximum interest lenders could charge on credit cards, despite lifting the policy rate.

Looser fiscal policy ahead of local elections in March presents another threat, with monthly inflation already rising the most since August last month on the back of wage and tax raises.

Earlier this month, the central bank called the impact of a sharp pay hike in January as the biggest upside risk to consumer prices. Sticky inflation in the services industry, including rental costs, is another worry.

Tepav, an Ankara-based think tank that includes former central bankers, has called for a rate increase to 47.5% this month, warning about a deterioration in public finances and its potential spillover into inflation. 

--With assistance from Joel Rinneby.

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