Turkey’s central bank ‘is getting serious about inflation’

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Turkey’s central bank raises interest rates by 2 percentage points – a larger-than-expected movement analysts say signals that the newly installed governor is setting monetary policy free from political pressure.

Turkey’s central bank raised interest rates by 2 percentage points to 17 percent on Thursday – a larger-than-expected move as it seeks to cool double-digit inflation and strengthen its political credibility under new governor Naci Agbal.

Lira came to its strongest in more than a month, and analysts said Agbal passed a test of his ability to set monetary policy free from political pressure after just two months on the job.

The bank faced record dollarization and a weak lira, lifting its repo rate in one week from 15 percent. It again promised “resolutely” to keep the policy tight to permanently lower inflation, which stood at 14 percent last month and has been above target for years.

“Agbal has completely passed the test” and showed that the bank “is getting serious about inflation”, said Cristian Maggio, head of strategy for new markets in TD Securities.

The lira – among the weakest of the new market currencies this year – gathered as much as 1 percent against the US dollar and stood at 7,575 at. 11:55 GMT.

The tightening follows a sharp rise of 4.75 percentage points last month, which was Agbal’s first move after taking the reins in a surprising management review in which Turkish President Tayyip Erdogan promised a new market-friendly economic era.

The “strong” tightening was intended to “eliminate risks to the inflation outlook, include inflation expectations and restore the disinflation process as soon as possible,” the policy committee said in a statement.

Economists predicted a 1.5 percentage point increase in a Reuters poll, calling it a credibility test in light of Erdogan’s earlier criticism of high rates, especially with coronavirus declines putting the economy shrinking this winter.

But inflation is rising well above the 5% target range, and the Turks continue to buy foreign currencies at record levels, keeping Turkey’s lira close to record lows and putting pressure on the bank to tighten again.

The bank said currency purchases will flip with inflation.

Agbal acknowledged last week that the lira’s fall of around 23 per cent this year has kept inflation high, but the bank still sees it fall to 9.4 per cent by the end of 2021.

The lack of monetary stimulus could exacerbate an economic downturn due to restaurant closures and new curfews following the first wave of the pandemic, which sharply diminished activity in the second quarter.

But the central bank is focused on inflation and its depleted currency buffer, which on a net basis has fallen by more than half this year due to expensive government interventions in the foreign exchange markets in support of the lira.

Erdogan has long blamed high rates of inflation – as opposed to economic orthodoxy – and has held foreign investors accountable for the misery of the economy. But last month, he said even “bitter” policies would be adopted.

TD’s Maggio said there will be more tests for Agbal because foreign investors have been deeply scarred by many years of Turkish policy pushing them out of local assets.

During the crisis in 2018, the bank raised interest rates to as high as 24 percent.



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