News ID: 230755
Published: 0153 GMT September 03, 2018

Turkey's central bank promises action after inflation surges to 15-year high

Turkey's central bank promises action after inflation surges to 15-year high

Turkey’s central bank said it would adjust its monetary stance given “significant risks” to price stability, a rare move to calm financial markets after inflation surged to its highest in nearly a decade and a half on Monday.

The comments from the central bank underscore the volatile outlook for prices amid a currency crisis. The lira has lost 40 percent of its value against the dollar this year, driving up the cost of goods from potatoes to petrol and sparking alarm about the impact on the wider economy and the banking system, Reuters wrote.

Inflation jumped 17.9 percent year-on-year in August, official data showed, outstripping market expectations and marking its highest level since late 2003.

“Recent developments regarding the inflation outlook indicate significant risks to price stability. The central bank will take the necessary actions to support price stability,” the bank said in a statement.

“(The) monetary stance will be adjusted at the September monetary policy committee meeting in view of the latest developments.”

For investors, the main question has been whether the central bank will be able to sufficiently hike interest rates at its next policy-setting meeting on September 13 to tame inflation. It left rates on hold at its last meeting in July, confounding expectations and sending the lira sharply weaker.

President Recep Tayyip Erdogan, a self-described “enemy of interest rates”, wants to see lower borrowing costs to keep credit-fueled growth on track. Investors, who fear the economy is set for a hard landing, want big rate hikes.

Finance Minister Berat Albayrak told Reuters in an interview on Sunday that the bank was independent of the government and would take all necessary steps to combat inflation. He also promised a “full-fledged fight” against inflation.

By signaling that it was ready to take action, the central bank may now have inadvertently set financial markets up for disappointment if it doesn’t deliver a hefty increase, said Piotr Matys, an emerging markets forex strategist at Rabobank.

“A proper rate hike is required and by making a pledge to raise interest rates, the central bank may have raised the bar for itself to exceed expectations on September 13,” Matys said.

“The central bank basically has no room to disappoint.”

The bank is likely to deliver a rate hike of two percentage points on Sept. 13, far short of the 7-10 percentage points that investors would like to see, said Jason Tuvey of Capital Economics in a note to clients.

Such increases are needed “to bring real interest rates back to positive territory and reassure the markets that policymakers are willing and able to tackle high inflation,” he said.

Inflation jumped 2.3 percent from the previous month, the data from the Turkish Statistical Institute also showed, higher than the 2.23 percent forecast in a poll.

Producer prices rose 6.6 percent month-on-month in August for an annual rise of 32.13 percent.


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