Turkish Inflation Pressures Central Bank to Keep Policy Tight


Turkish inflation quickened for a fourth month as the lingering impact of a weak lira led to a broad-based rise in prices.

That means Turkey still faces pressure to keep monetary policy tight, even after the new central bank governor boosted his credibility among investors through rate hikes, policy simplification and hawkish pledges. Consumer prices increased an annual 15% in January, more than the median estimate of 14.7% in a Bloomberg survey of 21 economists.

A weak lira and rapid credit growth underpinned by negative real interest rates kept inflation in double digits all of last year, forcing new central bank Governor Naci Agbal to raise the one-week repo benchmark interest rate by 675 basis points to 17% since his appointment in November.

“While inflation once again exceeded expectations, it is easier for the market to accept this negative surprise due to a strong pledge from Governor Agbal to keep interest rates at high levels for a long time,” according to Rabobank’s emerging market strategist Piotr Matys. Without this commitment, the lira-- which held steady after the data release -- would most likely have weakened, he said.

Now, “once inflation finally peaks and the upside trend will be at least partially reversed, real interest rates will start rising, making the lira an even more attractive high yielder,” he said.

Turkish Inflation Pressures Central Bank to Keep Policy Tight

Turkey’s statistics agency also raised the weight of food and non-alcoholic beverages in its inflation basket to 25.94% from 22.77%.

The Turkish central bank raised concerns over the price growth outlook Tuesday in a mandatory letter to the government outlining why inflation deviated from its target in 2020. Factors including domestic demand, the exchange rate, rising international commodity prices and supply constraints “continue to affect the pricing behavior and inflation outlook adversely,” the monetary authority said.

Last week, Agbal said he will maintain a tight monetary policy stance until he meets his inflation target in 2023, a pledge aimed at easing fears that he will prematurely lower interest rates like his predecessor.

The next rate-setting meeting is scheduled for Feb. 18.

©2021 Bloomberg L.P.

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