The emerging world’s worst performer against the dollar last month, Turkey’s currency has fallen victim to a campaign of stimulus that’s consisted of steep interest-rate cuts alongside a surge in fiscal spending and a government-sponsored credit push.
Although the policies helped contain the economic damage from the coronavirus pandemic, Turkey will now have to contend with faster inflation and pressure to tighten monetary policy. Data due Thursday will show consumer prices rose an annual 11.9% in August, a slight uptick from the previous month, according to the median of 19 forecasts in a Bloomberg survey.
The lira reached historic lows and depreciated over 5% against the dollar in August. It’s down more than 19% for the year. Goldman Sachs Group Inc. said the slide is likely to be “the key driver of inflation in August and September.”
“This sizeable depreciation may lead to a higher than average share of firms to adjust their prices, implying upside risks to our inflation forecasts,” Goldman’s economists including Murat Unur said in a report to clients. They expect inflation to remain around 12% in the coming months before falling to 11.7% by the end of the year.
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Although policy makers led by Governor Murat Uysal have kept the benchmark at 8.25% during the past three meetings, they have already started tightening liquidity by using fringe tools and ceasing to provide funding at their cheapest rate, the one-week repo. The central bank projects price growth will end the year at 8.9%.
What our economists say…
“Currency depreciation remains a lingering threat and could keep Turkey’s price growth in double digits throughout the year. The lira’s weakening so far this year poses upward risks to the central bank’s inflation outlook.”– Ziad Daoud
Tightening policy by the backdoor may be a way to avoid angering President Recep Tayyip Erdogan, but it’s unlikely to help contain inflationary pressures. The average cost of cash provided by the central bank rose to 10.15% on Tuesday, compared with as low as 7.34% in July.
“In order to hike the one-week repo rate, it will have to overcome Erdogan’s reluctance to let this happen,” said Sebastien Barbe, the Paris-based head of emerging-market research and strategy at Credit Agricole SA. “This could occur when the depreciation pressure on the lira intensifies further, possibly in the course of the fourth quarter.”
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