Turkey’s central bank faces next test of inflation-fighting credentials


Turkish central bank governor Naci Ağbal will reveal his latest inflation forecasts on Thursday, giving him another chance to prove to investors that he will keep monetary policy tight to defend the lira and battle double-digit inflation.

The central bank’s year-end inflation estimate of 9.4 percent, set by Ağbal’s predecessor Murat Uysal, is lower than the 11.2 percent forecast by finance industry professionals in the bank’s latest monthly survey of economic expectations.

Turkish President Recep Tayyip Erdoğan hired Ağbal in early November after the lira slumped to successive record lows against the dollar. Since then, Ağbal and his team have raised interest rates to 17 percent from 10.25 percent, sparking a rally in the lira and inflows of foreign capital. The bank left interest rates unchanged earlier this month.

Speaking to Bloomberg, Hakan Kara, chief economist at the central bank until 2019, said higher commodity prices and an increase in the minimum wage require an upward revision to the year-end forecast. Yarkın Cebeci, an economist at JPMorgan Chase & Co., said his estimate for inflation in 2021 stood at 10.5 percent but that annual price increases could slow to single digits by December.

Lax monetary policy – the central bank kept rates at below inflation for much of last year to help Erdoğan stimulate a borrowing boom – has damaged the central bank’s credibility among investors. But some are now heralding Ağbal’s arrival as a new era for monetary policy as the bank chases a medium-term inflation target of 5 percent.

Inflation in December stood at 14.6 percent, almost triple the central bank’s goal. The government estimated that inflation would slow to 8 percent by the end of 2021 in an economic programme announced in September.

Ağbal is facing political pressure to lower borrowing costs. Erdoğan has sacked two central bank governors in two years and reiterated his opposition to high interest rates twice this month. Erdoğan claims that higher interest rates stoke inflation, a view that contradicts conventional economic theory.

“In Ağbal we trust!” Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said in comments on Twitter on Wednesday. “Ağbal is key to the market turnaround.”

The lira was trading down 0.3 percent at 7.41 per dollar at 10:15 a.m. local time in Istanbul on Thursday. The currency hit its all-time low of 8.58 per dollar on Nov. 6. After losing 20 percent of its value in 2020, it is one of the few emerging market currencies to gain so far this year.

Turkey’s leading business groups issued a joint statement this week calling on the authorities to prioritise dealing with double-digit inflation, which they said was key to ensuring the country’s long-term financial well-being and to encourage more investment.



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