Turkey’s central bank to take action after inflation hits 18%

Turkey’s central bank said on Monday that it would take action after inflation surged to its highest in nearly a decade and a half, Reuters reported.

Inflation jumped 17.9 percent year-on-year in August, official data showed, outstripping market expectations and marking its highest level since late 2003.

“We will take necessary actions,” the central bank said in a statement. “Monetary stance will be adjusted,” it added, bolstering expectations that it will increase rates when it meets on Sept. 13.

The comment gave a boost to the lira, though it was still more than 1% weaker than where it traded Friday. In midday European trading, $1 bought 6.62 lira.

Economists said the central bank would likely come under government pressure to limit the rate increase.

“To our mind the central bank should surprise the market by raising rates by at least 10%,” Rabobank economist Piotr Matys said. “However, as always, there is a massive difference between what the central bank should do and what it will be capable of doing amid perceived dislike for higher rates amongst prominent Turkish officials.”

Turkey’s Finance Minister Berat Albayrak, President Recep Tayyip Erdogan’s son-in-law, has said fighting inflation was a priority and that the central bank was independent in defining monetary policy.

Although hiking interest rates is widely seen as the most common tool to combat inflation and support a national currency, the lira has lost more than 40% this year, it has also been the most elusive in Turkey.

Mr. Erdogan, who has run Turkey for the past 15 years and won a new five-year mandate in June, says higher rates are a drag on investment and therefore hurt his goal of propelling high economic growth.

A significant rate increase could be fraught with political risk for Mr. Erdogan because many small entrepreneurs, who form a core part of his electoral base, depend on access to cheap loans to keep their businesses afloat.

“We know very well the steps we need to take,” Mr. Albayrak told a gathering of Turkish businessmen last week, repeating his pledge to announce a detailed economic program during September.

The Turkish economy had a stunning run last year, expanding 7.4%. But economists say much of that growth was achieved on the back of foreign currency loans, which are now at the heart of growing concerns over Turkey’s financial stability. The weaker lira has increased the burden of repaying those loans, and a string of corporate defaults could weigh on Turkish banks, economists say.