Turkish Central Bank Pledges Policy Action to Stem Inflation

(Bloomberg) -- Turkey’s central bank signaled higher interest rates are in the offing after inflation rose more than forecast in August and producer prices surged.

The lira briefly erased losses after the announcement.

“The monetary stance will be adjusted at the September monetary policy committee meeting in view of the latest developments,” the central bank said in a statement, citing the deterioration in the inflation outlook.

Monetary policy makers tipped their hand 10 days before they’re scheduled to meet after new data showed prices rising the fastest in 15 years as the run on the lira takes a toll on consumers. Inflation accelerated a surprising 17.9 percent last month and producer prices climbed more than 32 percent, Turkstat reported on Monday.

Turkish Central Bank Pledges Policy Action to Stem Inflation

By signaling a hike, the bank has also created expectations that the increase will be big enough to stem the rise in inflation, according to Piotr Matys, a currency strategist at Rabobank in London.

“Such a pledge puts more pressure on the Turkish central bank to deliver a proper rate hike,” Matys said. “Essentially, the central bank raised the bar for itself to exceed expectations on Sept. 13.”

A move in that direction would put the bank at odds with President Recep Tayyip Erdogan, who has opposed outright tightening, instead placing a premium on economic growth over the lira’s robustness. He’s accused foreign agitators of trying to undermine the Turkish economy by “attacking” the lira, and has said his country can withstand the alleged onslaught.

The lira trimmed losses after the statement and was trading 1.3 percent lower at 6.6259 per dollar at 12:57 p.m. in Istanbul.

Inflation Details

The annual inflation rate rose to 17.9 percent in August from 15.9 percent the previous month, exceeding the median estimate of 17.6 percent in a Bloomberg survey. Turkey’s state statistics office said the monthly inflation was 2.3 percent, compared with 1.84 percent in a separate survey.

The even faster rise in producer prices suggested that manufacturers and service providers are finding it difficult to pass on some of their added costs to end-users just yet, but eventually they will have little choice.

Inflation data show consumer demand collapsing, and it could weaken further if borrowing costs are raised, according to Bluebay Asset Management LLC strategist Tim Ash.

Still, “if they don’t hike again by something significant, the lira will be left exposed again,” Ash said by email. “They need to do whatever they need to do short-term to hold the lira, and that means hiking rates.”

The currency lost more than 40 percent of its value against the dollar this year even as the central bank raised costs by around 5 percentage points before the latest run on the lira. The bank used fringe tools and an extraordinary lending mechanism to increase the cost of cash it provides to commercial lenders from mid-August to deliver another 150 basis points of tightening.

Below are some of the highlights from Monday’s inflation report:

  • Energy index, which tracks the price of power and refined oil products, rose 21.34 percent from the previous year, compared with 17.5 percent in July
  • Core inflation, which excludes volatile items such as gold and energy, accelerated to 17.22 percent, compared with 15.1 percent during the same period
  • Food prices, which makes up nearly a quarter of the consumer inflation basket, rose an annual 19.75 percent, up from 19.4 percent
  • Producer prices rose an annual 32.1 percent, from 25 percent

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