Turkey Yearly Inflation Miss Sets Stage for High Rates Into 2021

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Turkey’s year-end inflation rate is set to exceed even the central bank’s bumped-up forecast, leaving Governor Naci Agbal with little choice but to keep access to credit tight well into 2021.

Data due Monday will probably show consumer prices rose an annual 14.2% through December, up from 14% the previous month, according to the median estimate in a Bloomberg survey. That’s higher than the central bank’s raised October forecast of 12.1%, and nearly triple the target of 5%.

A weak lira and rapid credit growth driven by negative real interest rates kept the rate of price growth in double digits the entire year. Agbal took over only days after the October revision, promisinga simple monetary policy and borrowing costs high enough to tame inflation. He’s since raised the benchmark interest rate by 675 basis points to 17%, stabilizing the lira as foreign investors returned.

Despite the change in policy guidance, though, price growth is unlikely to slow to single digits next year either, according to Nihan Ziya Erdem, chief economist at Garanti BBVA Securities. She says she expects that to mean a period of tight monetary policy through the end of the coming year.

“Despite the appreciation in the lira in December, the increase in Brent oil prices to an average of $50 per barrel caused fuel prices to increase,” she said.

Turkey’s November’s overhaul of its economic management team — installing Agbal and replacing the Treasury and Finance minister, spurred a 16% rally in the lira against the dollar. Still, the currency is down about 19% from a year earlier, fueling broad price pressures because Turkish producers rely on imports of raw materials and energy.

Retail prices in Turkey’s largest city, Istanbul, rose 1.36% in December from the previous month, according to the city’s Chamber of Commerce. Its annual retail inflation accelerated to 14.4% from 14.1% in November.

The currency weakness was driven largely by low interest rates offered by Agbal’s predecessor, who set borrowing costs below the inflation rate. If consumer prices rise in line with the median estimate of 14.2% in the survey, Turkey’s interest rate would cap the year at about 2.8% above it.

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