Turkey’s central bank raised its inflation forecasts for this year and next yesterday and indicated it could hike interest rates once the US Federal Reserve begins to tighten, in what could be a boost for the long-suffering lira currency.
In delivering the bank’s quarterly report on inflation, Governor Erdem Basci said it was not “totally incorrect” to say Turkey may raise interest rates if the Fed does.
That is welcome news for investors and economists who have repeatedly called on the central bank to hike rates and put a floor under the lira, one of the worst performing emerging market currencies this year.
The bank’s lack of action has inflamed concern about political meddling in monetary policy. President Tayyip Erdogan has lobbied against higher rates, equating them with treason.
Turks go to the polls in a snap election on November 1.
“There’s a positive here,” said William Jackson of Capital Economics in London. “The inflation forecasts have been revised up, which I think is absolutely key.”
“If we take a step back and think about the political issues facing the central bank, it has faced significant criticism in the past for raising rates. Publicly announcing that the Fed will be the trigger for it is quite a convenient cover for the central bank to raise rates,” he added.
In the quarterly report, the bank said it forecasts an inflation mid-point of 7.9% at the end of 2015, up from 6.9% in its previous report.
For the end of 2016, it said it sees the mid-point at 6.5%, up from 5.5% in its previous report.
Basci said foreign exchange movements and food prices have influenced annual inflation although the impact from forex on prices this year has been more limited than in the past.
The lira’s chronic weakness is seen as a driver of inflation. The currency has lost more than 20% of its value against the dollar this year.
Basci also said the bank will assess how to simplify its interest rate corridor at a monthly policy meeting after the Fed hikes rates.
The corridor encompasses four different rates for borrowing and lending, depending on parameters set daily by the bank.
The bank said in August it planned to narrow the corridor once global monetary policies start to normalise, as part of a “roadmap” released to prepare for such changes.
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