Case for Raising Turkish Rates Just Got Stronger With Inflation

  • Inflation rises to 53 basis points above key interest rate
  • Central bank will need to raise rates to lift assets: Odeabank

Piccoli, Foley on Turkey's Economy

It’s only the second trading day in 2017, and Turkish assets are already having a bad year.

The lira sank the most among the world’s major currencies to an all-time low after inflation quickened to 8.53 percent last month, 53 basis points above one of the nation’s key interest rates. That erodes the yield on Turkish assets already under pressure from growing security concerns and adds pressure on the central bank to raise borrowing costs.

Click Here for More on Turkey’s Inflation

“The currency’s depreciation since end-September calls for at least 200 basis points of rate hikes just to keep the real rate stable,” said Inan Demir, a London-based economist at Nomura International Plc. “To beef up real yield support for the lira, the magnitude of the hikes will have to be larger.”

The central bank, which is under government pressure to ease borrowing costs to spur economic growth even when inflation is still well above its target, raised the top end of its three-pronged interest rate corridor 25 basis points in November. That month, it also boosted the one-week repurchase rate 50 basis points to 8 percent for the first time since 2014.

There might be rapid slowdown in Turkey’s inflation in January because tax increases on tobacco and alcohol beverages were delivered last month, according to Odeabank AS’s Sakir Turan, the only analyst in the Bloomberg survey who accurately predicted the annual and monthly inflation.

The central bank may choose to avoid a policy response when it meets later this month, saying the spike in price gains was expected anyway and its size was within range it saw as possible, Turan said.

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