Turkey cenbank to keep policy tight and could hike more, chief says

ISTANBUL (Reuters) - Turkey will keep monetary policy tight in the new year and is prepared to hike interest rates more if necessary to finally lower inflation in a lasting way, newly appointed Central Bank Governor Naci Agbal said on Wednesday.

FILE PHOTO: A logo of Turkey's Central Bank (TCMB) is pictured at the entrance of the bank's headquarters in Ankara, Turkey April 19, 2015. REUTERS/Umit Bektas

Agbal, who took office in early November in a surprise leadership overhaul, also said the bank will share a detailed plan for rebuilding its depleted foreign-currency (FX) reserves next year without any target for the lira in mind.

Last month the bank hiked its key rate by 475 points to 15%. But inflation jumped to 14% in November and Turks continue to buy foreign currencies at record levels, putting pressure on the bank to tighten again as soon as next week.

Agbal acknowledged that the lira’s 25% drop this year - among the worst in emerging markets - has kept inflation well above the bank’s target range around 5%.

“We are determined to achieve disinflation,” he told reporters and economists in an online presentation of the policy plan for 2021.

“In order to achieve this objective we will tighten monetary policy if necessary,” Agbal said. “In 2021, we will maintain a tight stance in monetary policy until there is a lasting fall in inflation.”

The governor, appointed by President Tayyip Erdogan, said the bank still forecast 9.4% inflation by the end of 2021 and was determined to hit 5% in 2023.

The lack of monetary stimulus could exacerbate an economic slowdown through the winter as a recent coronavirus surge has brought restaurant closures and curfews. The economy contracted sharply in the second quarter amid the pandemic’s first wave.

But the central bank is focused on inflation and its depleted FX buffer. Net reserves are down by more than half this year due largely to costly state interventions in FX markets to support the lira.

“We aim to strengthen foreign currency reserves gradually,” Agbal said, predicting rediscount credit returns should add $21 billion in 2021. The bank will give a transparent plan that does not interfere with the free floating lira, he said.

The lira has hit a series of record lows beyond 8 to the U.S. dollar this year, but has recovered some ground since Agbal was named governor and delivered the rate hike. It was 0.5% firmer at 7.79 at 0930 GMT.

Additional reporting by Nevzat Devranoglu and Can Sezer; Writing by Jonathan Spicer; Editing by Dominic Evans and Angus MacSwan