Turkey's Inflation Busting Central Banker Faces an Implacable Foe


Turkey’s new-found credibility as an inflation fighter is imperiled by global forces more pervasive than President Recep Tayyip Erdogan’s hatred of high interest rates.

The biggest risk to the Turkish central bank’s three-month campaign of tight money isn’t Erdogan, who clings to an unorthodox view that high borrowing costs result in inflation, and not the other way around. The biggest challenge is the very disappointing start to the year for the global economy and the profound disinflationary forces still gripping the world. 

Central bank chief Naci Agbal’s image as a price buster was on display last week when he pledged to keep monetary policy tight for several years. Inflation will be 9.4% this year, receding to the bank’s 5% target only in 2023, Agbal forecast. It’s too soon to talk about rate cuts, he said, after hikes worth a staggering 675 basis points since he took the helm in November. Reductions of that magnitude have been more the norm for monetary authorities in the pandemic era. 

Investors like Agbal’s tough talk, in part because it contrasts with the stance of his predecessors, who allowed inflation to shoot up. The Turkish lira is up about 15% against the dollar over the past three months, making it the best-performing emerging-market currency. For all this applause, its important to remember that Agbal is still new to the role. The jury is out on how long Erdogan, who fired Agbal’s predecessor, will indulge this muscular display of hawkishness.

But the president, who recently returned to railing about high rates, might not be Agbal’s biggest opponent. So entrenched are the forces constraining global inflation that the pace of Turkey’s consumer-price increases may slow a lot more than the central bank projects. Remember all the bullish scenarios for a massive economic rebound in 2021? They might still come to pass, but optimists didn’t have a happy January. The pull of gravity outside Turkey’s borders might, in the end, be too great.

Agbal would then be facing the prospect of doing what Erodgan wants, even if Agbal’s motivation is different. It’s unlikely that a polarizing figure like Erdogan gives up on one of his signature views. More likely, the president will sense things moving his way and amplify pressure, rather than step back and give his man space. To preserve his anti-inflation reputation, Agbal would have to send the message that Erdogan is off beam and the real reason for stepping back is the global economy. Distancing himself from Erdogan is a very different calculus from quietly ignoring the president.     

Anyone doubting the extent to which Turkey has become an island in a sea of easy money need only listen to Federal Reserve Chairman Jerome Powell. Asked at a press conference Wednesday about concerns too much stimulus will juice inflation, Powell sketched a dour view of the world: “If you look around the world, look in Western Europe, look at Japan, around the world, large economies have felt much more downward pressure on inflation, have fallen short of their inflation goals for some time now. That is the broad global macroeconomic context that we all live in. And we believe that those global forces, which are aging demographics, advancing technology and globalization, those forces are still in effect.”

Assessments like this ought to be disappointing for hawks. The guardian of the world’s reserve currency isn’t remotely done with easing. Nor is the European Central Bank, Bank of Japan, Bank of England and a constellation of emerging-market central banks. Turkey sticks out. That’s helping Agbal for now because it underscores the difference between him and his predecessors. But it’s a questionable long-term bet. The lira desperately needed stability, which Agbal delivered. At some point, the currency might look too strong. Agbal even hinted Thursday at the prospect of still higher rates if warranted to choke inflation.

Okay, governor, we get it. The bad old days of lax money are over. Inside Turkey, that is. Beyond the country’s borders, it’s a very different scene. Agbal can’t ignore that forever. His truly hard work may be in front of him.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

©2021 Bloomberg L.P.

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