Turkey Inflation Outlook Opens Gap for Late 2021 Rate Cut
(Bloomberg) -- Turkey’s central bank raised its inflation expectations but projected a significant drop in price growth in the final quarter that could open a window later this year for the interest-rate cut sought by President Recep Tayyip Erdogan.
Consumer-price inflation will finish 2021 at 14.1%, compared with a previous forecast of 12.2%, Governor Sahap Kavcioglu said Thursday as he unveiled the second inflation report of his central banking career. Most economists were expecting the bank’s year-end prediction to be above 15%, after rising global commodity prices and a lira just shy of record lows pushed the inflation rate to 17.5% in June.
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Erdogan holds the unorthodox belief that higher interest rates spur rather than curb inflation, and had wanted a reduction in borrowing costs for this summer as the economy emerges from the pandemic.
Kavcioglu’s expectation that inflation will fall “significantly” by the end of the year implies that the monetary authority “could be tempted to commence a monetary policy easing cycle in the fourth quarter of 2021, or the first quarter of 2022, at the time when Fed potentially becomes more hawkish,” said Piotr Matys, a senior FX analyst at InTouch Capital Markets Ltd.
“For the lira to remain relatively stable, the CBRT has to maintain a sufficiently attractive interest rate differential between its policy rate and those of major central banks,” he said.
Below are some of the highlights of Kavcioglu’s presentation:
- Inflation rate to decline to 7.8% by the end of 2022, also an upward revision from 7.5%
- End-2021 food inflation estimated at 15%, compared with 13% previously
- The central bank’s 2021 average oil price forecast $69.6 per barrel
Kavcioglu has kept Turkey’s benchmark interest rate unchanged at 19% since his appointment in March as rising prices and a lira that’s lost more than 15% against the dollar during his reign blight the economy’s recovery from pandemic lockdowns.
He has pledged to maintain a positive rate when adjusted for realized and expected inflation, and to maintain tight policy until the bank’s 5% inflation target is achieved.
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