Turkey’s central bank said it will keep monetary policy tight next year and refrain from buying lira in the currency markets as it sought to rebuild investor confidence. The lira rose.
Central bank governor Naci Ağbal made the pledges in a statement on Wednesday to outline the bank’s monetary policy plans for next year.
The central bank has spent tens of billions of dollars of its foreign currency reserves defending the lira this year, leaving its war chest severely depleted. Turkish President Recep Tayyip Erdoğan hired Ağbal on Nov. 7 after sacking his predecessor. The lira hit an all-time low of 8.58 per dollar on Nov. 6.
“The central bank will not conduct foreign exchange buying or selling transactions to determine the level or direction of exchange rates,” Ağbal said.
Ağbal said the central bank would follow a simplified and understandable monetary policy to decisively slow inflation towards medium term goals. The central bank’s 2021 inflation target of 9.4 percent should be considered an interim goal towards slowing annual price increases to 5 percent in the medium term, he said.
“Upside risks to inflation require the monetary policy stance to be tight and decisive in 2021,” he said. “Monetary policy decisions will be taken by giving priority to price stability.”
The lira gained, trading up 0.6 percent at 7.78 per dollar after Ağbal spoke. It had rallied to as high as 7.5 per dollar after his appointment last month. Losses this year stand at about 25 percent.
Murat Uysal, Ağbal’s predecessor, had kept interest rates at below the rate of inflation to help support the government’s pro-growth economic policies. President Recep Tayyip Erdoğan’s public opposition to higher interest rates has raised concerns among investors that Ağbal might reduce borrowing costs at the earliest opportunity.
“Really encouraging messaging from Ağbal and the central bank. Let’s hope Erdoğan let’s him do the job he is clearly capable of doing,” said Tim Ash, a senior emerging markets strategist at BlueBay Asset Management in London.
The central bank met investor expectations by hiking the benchmark interest rate to 15 percent from 10.25 percent last month to defend the lira and curb inflation. The consumer price inflation rate climbed to 14 percent last month from 11.9 percent in October. The bank next meets on interest rates on Dec. 24.
Ağbal said the central bank would tighten monetary policy further if needed as it sought to achieve the medium-term inflation goal.
“Aware of its responsibility in reaching this target, the central bank will remain determined and resolute over the target horizon,” he said.
Inflation is expected to remain in double digits over the next 12 months, according to a monthly central bank survey of financial market professionals and business leaders.
The annual inflation rate may fall to 10.8 percent by November next year, according to the bank’s latest survey published last month. It was seen at 9.2 percent in 24 months.
(This story was updated with central bank comments in the 4th and 6th paragraphs, economist in 9th.)