Turkish central bank sees inflation above target for some time

Turkey’s central bank held fire on interest rates but signaled more tightening of its day-to-day policy

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The recent weakness of Turkey’s lira means inflation will stay above target for some time and monetary policy will remain cautious as a result, the central bank said in a presentation to economists on Wednesday.

The bank said its cancellation of one-month repo auctions, announced on Tuesday, would bring its cumulative tightening in money market rates to around 350 basis points (bps) since May, compared to a 60 bps rise in 1-year inflation expectations.

“In order to contain the adverse impact of (inflation) ... the committee decided to strengthen the cautious stance of monetary policy and further reduce the volatility of short term money market rates,” the presentation, also published on the bank’s website, said in explanation of Tuesday’s decision.

The bank held fire on interest rates but signaled more tightening of its day-to-day monetary policy on Tuesday, as it worries about a withdrawal of U.S. monetary stimulus that could weaken the lira and push inflation up further.

Its decision to stop funding the market through weekly one-month repo auctions gives it tighter control over overnight lending rates and will enable it to increase banks’ cost of funding more sharply if needed.

“They are trying to send a message that they are now focusing on inflation,” said Timothy Ash, head of emerging markets research at Standard Bank, who attended the meeting with economists.

Emerging market currencies have gained ground in recent weeks on expectations the U.S. Federal Reserve will wait until March before trimming bond-buying that has flooded the developed world with cheap dollars.

But the lira remains near historic lows against the dollar as Turkey’s huge current account deficit leaves it vulnerable to eventual reining in of policy by the Fed.

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