Turkey Says More Tightening Possible as Inflation Surges

  • Central bank lifts inflation forecast for 2017 to 8% from 6.5%
  • Cetinkaya says double-digit inflation is ‘important risk’

Turkey’s central bank said further tightening of monetary policy remains “on the table,” and that the lira’s rapid plunge has put the inflation target out of reach until 2019.

Inflation, driven by the weaker currency, will reach 8 percent at the end of 2017, up from the previous estimate of 6.5 percent, Governor Murat Cetinkaya told reporters in Ankara on Tuesday. The potential for it to reach double digits at some point this year is an “important risk,” he said.

In addition to raising a benchmark interest rate, the central bank has rolled out a series of unorthodox measures in recent weeks to bolster the lira, including using swaps to smooth volatility and forcing commercial lenders to borrow via the more expensive late-liquidity window. President Recep Tayyip Erdogan’s officials have softened their usual demands for lower borrowing costs to spur growth as the currency plunged.

The bank’s steps have stabilized the lira and will be around “for some time,” Cetinkaya said.

Policy makers “seem to be content with the current level of policy tightness, but can increase if need be,” said Bora Tamer Yilmaz, an economist at Ziraat Bank in Istanbul. “The central bank seems to be taking the mounting inflationary pressure seriously.”

Lira Weakens

The lira traded 0.2 percent lower at 3.7878 per dollar at 5:19 p.m. in Istanbul. It has lost about 7 percent this year, following last year’s 17 percent plunge.

The bank also revised its inflation forecast for 2018. It had forecast the year-end rate would meet its 5 percent inflation target, but now expects it to be 6 percent, Cetinkaya said.

The new forecasts are more realistic but will stoke skepticism of the bank’s commitment to its inflation target, according to Inanc Sozer, a managing partner at Turkey Macro View Consulting in Istanbul.


Cetinkaya spoke days after Fitch Ratings cut its sovereign debt rating for Turkey to junk. Government-backed purges have extended beyond alleged members of a group blamed for July’s failed coup attempt, unsettling economic actors, Fitch said. Terrorist attacks have also damaged consumer confidence and tourism.

“Recent indicators suggest the 2017 recovery in domestic demand might be slower than we had forecast,” Cetinkaya said, adding that fourth-quarter data indicate only a moderate economic recovery from the third quarter contraction following the coup.

The bank’s eventual plan to simplify monetary policy remains in place, despite the recent measures to tighten liquidity, Cetinkaya said. The bank has said it wants to reduce the gap between the overnight lending and borrowing rates -- the upper and lower bands of its so-called triple rates corridor -- and use the one-week repo rate as the main funding tool.

Since Jan. 12, the central bank has issued no funding using the one-week repo rate, instead directing lenders to the late-liquidity window. At 11 percent, it’s higher than all three of the bank’s key rates.

— With assistance by Selcan Hacaoglu

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