Turkish central bank may raise rates as inflation soars to 15 year high

The move by the regulator may be too little too late according to analysts

The inflation rate rose to 17.9 per cent last month, more than three times the central bank’s target of five per cent. . EPA/ERDEM SAHIN

Turkey’s central bank said it may raise interest rates, which the country's president has been vehemently opposed to, in its next meeting in September after inflation soared to 15-year high in August, but analysts said the move may be too little too late.

“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 financial regulator said in a statement on its website on Monday. “Accordingly, in line with the previous communication, monetary stance will be adjusted at the September Monetary Policy Committee Meeting in view of the latest developments.”

The inflation rate rose to 17.9 per cent last month, more than three times the central bank’s target of five per cent. Consumer prices have spiked amid an overheating economy and a reluctance from President Recep Tayyip Erdogan for interest rate increases, which he has dubbed “the mother and father of all evil.”

Mr Erdogan fears that higher interest rates will smother borrowing and lead to slower economic growth. Skyrocketing inflation forced Turkey to strike a deal on Monday with Qatar for cheaper oil products and natural gas.

The lira has also tanked about 43 per cent so far this year against the US dollar, with the steepest decline recorded in August, as the economic crisis escalated with last month’s slapping of US sanctions due to Turkey’s detention of an American pastor. Turkey had its sovereign credit rating downgraded by Moody’s Investors Service and S&P Global Ratings in August. Moody’s said the tighter financial conditions and weaker exchange rate, associated with high and rising external financing risks, are likely to fuel inflation further and undermine growth, and said the risk of a balance of payments adjustment continues to rise.

“The jump in Turkish inflation in August to a fresh 15-year high raised further questions over the lack of a response from the central bank to the recent collapse of the lira,” said Jason Tuvey, an economist with Capital Economics. “As it happens, the release of the data prompted the CBRT [Central bank of the Republic of Turkey] to announce that it will change its monetary policy stance at its September MPC meeting. While this means that an interest rate hike is now on the cards, we suspect that will be in the order of 200 basis points rather than the 700-1000bp hike that is needed to push real interest rates into positive territory and restore market confidence."

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The central bank kept its headline interest rate at 17.75 per cent in July even as inflation continued to surge and the lira to sink.

Already the crash of the lira and the Turkish financial crisis has unsettled investors.

“What is required is a cooling in the economy, both to permit inflation to fall but also for the external adjustment process to take place,” said Nafez Zouk, an economist with Oxford Economics. “There are signs that a slowdown is already taking place, but the CBRT has waited too long, and the slowdown in domestic demand will now have to be sharper than would have otherwise been the case.”

Turkey’s gross domestic product  expanded 7.4 per cent in 2017 at its fastest pace since 2013 - more than the growth in India and China. However, this year growth will taper as the financial crisis deepens.

“We think the central bank will eventually tighten monetary policy, by raising the key policy rate – the repo rate – amid the currency crisis and its impact on inflation,” said Carla Slim, an economist with Standard Chartered. “While there are concerns that such a move would weigh on an economy which is already expected to face a slowdown in activity, investors do expect a hike, particularly from a credibility perspective and given the CBRT’s statement today.”