Turkish central bank faces key credibility test as inflation accelerates

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Turkey’s central bank is facing perhaps the biggest test of its credibility since the arrival of governor Naci Ağbal in early November.

The bank’s monetary policymakers will gather in the capital Ankara on Thursday to decide on interest rates with the backdrop of accelerating inflation and a weakening lira.

Consumer price inflation in Turkey is gathering pace even after the bank raised rates from 10.25 percent with two hikes in November and December to 17 percent. Since then, the inflation rate has increased to 15.6 percent from 14.6 percent, and it is expected to increase further in March and April after global oil prices and the cost of food rose.

The Monetary Policy Committee will choose to hike interest rates by 1 percentage point to 18 percent, according to the average estimate of economists questioned by Reuters, the state-run Anadolu news agency and Bloomberg. Nearly all those polled predicted the increase.

Turkey needs higher rates to rein in inflation, but also to defend the lira. A recent rally in the lira has partly reversed, mainly because most Turks with savings stockpiled in dollars and euros amid currency volatility last year are reluctant to sell them.

The average interest rate on one-month lira deposits stands at an annual 15.6 percent, according to central bank data, providing scant returns to investors for taking on local currency risk. The rate stood at 16.1 percent at the start of the year. Holding cash in lira deposit accounts for a minimum of three months returns 17.3 percent annually.

The lira hit an all time low of 8.58 per dollar at the start of November. It had rallied to as strong as 6.88 per dollar by mid-February but now trades at around 7.5 against the U.S. currency.

The central bank also needs to raise rates to show that it can operate without political interference, some analysts say. Turkish President Recep Tayyip Erdoğan is a vocal opponent of high interest rates, saying they are inflationary, and has sacked two central bank governors in less than two years.

Investors “want reassurance about political interference in monetary policy,” said Kieran Curtis, an investment director at fund manager Aberdeen Standard Life, according to Reuters.

Ahval

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