ANKARA – Turkey’s central bank on Tuesday sharply raised its inflation forecast for this year and next, saying price pressures were the only factor in its policy decisions as it sought to emphasise its independence from political interference.
The bank raised its 2018 estimate to 13.4 percent from 8.4 percent and its 2019 year-end forecast to 9.3 percent from 6.5 percent, reflecting the impact of a free-falling lira and rising import prices.
It surprised financial markets this month with a decision to keep rates on hold, even after inflation spiked to a 14-year high of 15.39 percent in June.
The bank’s apparent reluctance to deliver the big rate hikes investors say are necessary to rebalance the economy has increased concern it is under pressure from President Tayyip Erdogan.
Erdogan – a self-described “enemy of interest rates” who said prior to being re-elected last month that he planned to exercise greater control over monetary policy – has repeatedly called for cheaper borrowing costs.
His comments have helped send the lira down by a fifth this year, driving up the cost of everything from food to fuel for ordinary Turks. A Reuters poll in mid-July forecast that full-year annual inflation will be higher than the central bank predicts, at 14 percent.
“The central bank and monetary policy committee make decisions based on the inflation outlook alone,” Governor Murat Cetinkaya told a news conference following the release of the bank’s quarterly inflation report.
“The central bank is granted independence of its objectives and tools.”
Inflation has helped drive the lira beyond 4.9 to the dollar in recent weeks, despite interest rate hikes of 500 basis points since April. At 1215 GMT the lira <TRYTOM=D3> stood at 4.8853, little changed from when Cetinkaya started speaking.
Data from the second quarter suggested economic activity was decelerating and had started rebalancing, Cetinkaya said.
However, inflation would show a limited increase in the third quarter, he said, adding that a tight monetary policy stance would be maintained for a long time.
Erdogan’s government is considering further stimulus measures to address an expected slowdown in growth in coming quarters, two officials told Reuters last week – a move that could raise expectations that fiscal policy will be loosened.
Even as the economy has kept growing – it expanded at 7.4 percent last year and the Reuters poll forecast growth this year at 4.1 percent – economists are concerned Erdogan is focused on expansion at seemingly any cost.
“Officials are reportedly preparing stimulus measures in a bid to prop up growth,” Jason Tuvey of Capital Economics said in a note to clients on Tuesday. “These would simply exacerbate Turkey’s economic vulnerabilities and could ultimately tip the country into a full-blown crisis.”
Separately, the central bank’s policy-setting committee said the exchange rate-driven rise in costs was likely to put further pressure on prices of core goods in coming months, according to the minutes of last week’s policy meeting, released on Tuesday.