Turkish Central Bank to Reckon With Inflation as Lira Casts Pall

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https://www.bloomberg.com-By Cagan Koc

  • Murat Uysal set to unveil price-growth projections Wednesday
  • Currency has been hitting a series of record lows this week

Turkish central bank Governor Murat Uysal is expected to revise inflation forecasts upward after a series of surprise interest-rate decisions failed to bolster a lira weakened by policy steps and international spats.

With the currency hitting record lows, Uysal is contending with a pickup in price pressures before Wednesday’s unveiling of the central bank’s base-case inflation scenario through 2020 and the next year.

The monetary authority in July projected inflation would end this year at 8.9% and 2021 at 6.2%.

Treasury and Finance Minister Berat Albayrak raised government forecasts in September to 10.5% at the end of 2020 and 8% the following year.

His projections came a week after the central bank delivered a surprise 200-basis-point rate hike that was intended to stem the slide in the currency.

Investors considered it insufficient, however, and the lira continued to fall, buffeted by geopolitical risk as Turkey intervened in conflicts and renewed diplomatic tussles over energy finds in the Mediterranean.

Another unexpected decision followed on Oct. 22, when the central bank held the benchmark while raising the upper bound of its interest-rate corridor. That rattled markets as it signaled the central bank’s once more focused on stealth tightening to support the currency.

“Pressures on inflation and the lira are likely to push the CBRT to being more conventional,” according to VTB Capital analyst Akin Tuzun, who expects an outright rate hike in November.

Tuzun said the central bank had in his view held rates this month to watch “October inflation, the U.S. elections, the global Covid-19 trends, and the effect of the sharp lira liquidity squeeze on local dollarization.”

In devising policy, the governor must weigh market reaction with the demands of President Recep Tayyip Erdogan, who continues to cast a long shadow over monetary policy. Erdogan handpicked Uysal to replace a governor who had failed to comply with his wishes to cut interest rates.

The Turkish leader is a firm believer that high borrowing costs fuel inflation. Most economists and central banks around the world believe the opposite.

The lira fell for a fourth day against the dollar on Tuesday, after sliding through the psychologically important 8 per dollar this week amid a flurry of negatives for risk assets. It’s now been depreciating for nine weeks, the longest rout since 1999.

The currency’s 27% slide this year has distorted previous central bank inflation projections. Uysal predicted earlier this year that annual price growth would drop to single digits from the second half, only for it to end the third quarter at 11.8%.

 

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