Middle East

Turkish cenbank chief says current account is key to price stability, lira

3 minute read

A logo of Turkey's Central Bank is pictured at the entrance of its headquarters in Ankara, Turkey October 15, 2021. REUTERS/Cagla Gurdogan

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  • Bank hikes end year inflation forecast to 18.4% from 14.1%
  • Kavcioglu says will evaluate room for further cuts
  • Central Bank repeats view that inflation pressures are temporary

ANKARA, Oct 28 (Reuters) - Turkey's central bank governor said on Thursday that addressing the current account deficit was key to tackling price stability and a weak lira, as the bank sharply revised its end-year inflation forecast to more than 18%.

Sahap Kavcioglu said the bank cut its policy interest rate recently because inflation pressures were temporary and he teed up more cuts in the next two months, saying the bank would evaluate how much room it has for easing.

"When we achieve current account surplus we will achieve financial and price stability," Kavcioglu said as he presented the bank's quarterly inflation review, adding that he expected the current account to improve during the rest of the year.

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"A 5% current account deficit contradicts with inflation, growth performance and price stability and it was not sustainable," he said.

A slide shown at the presentation reiterated there was limited room for further monetary policy easing by year-end, after the bank cut its policy rate by 200 basis points to 16% last week, following a 100 bps cut in September.

Kavcioglu reiterated the bank's view that some of the recent pressure on inflation came from transitory factors including a lifting of coronavirus-related restrictions over the summer.

That puts Turkey at odds with most other countries which are now assessing price pressures as more permanent and stronger than previously expected.

"The recent rise in inflation was caused by a rise in food and import prices, supply-side elements like disruption in the procurement processes, increase in regulated prices and developments due to reopening after the (COVID-19) outbreak," Kavcioglu said, adding that some factors would start to ease.

He also said the bank would keep building up reserves.

The bank raised its mid-point forecast for inflation at the end of this year to 18.4% from 14.1% and raised its end-2022 inflation forecast to 11.8% and end-2023 to 7%.

The lira, which fell to a record low against the U.S. dollar earlier this week before regaining some ground, weakened on Thursday by almost 1.4% to 9.6240 to the dollar at 1031 GMT.

The central bank's year-end forecasts, which have nearly doubled from 9.4% earlier this year, have well undershot the actual inflation rate over the last two years.

Inflation has been in double digits and well above emerging markets peers for most of the last four years, eating into Turks' earnings and hurting President Tayyip Erdogan's support.

Turkey's October inflation will be announced on Wednesday, and six economists have told Reuters they calculate the annual rate will climb above 20%, from 19.58% last month.

John Hardy, head of FX strategy at Saxo Bank said a major factor would be the latest falls in the lira, which has lost 22% of its value against the dollar this year, partly over concern at Erdogan's unorthodox push for lower interest rates.

"I'm not going to be an optimist until the behaviour ceases, and I don't think it will cease," Hardy said.

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Additonal reporting by Ezgi Erkoyun and Daren Butler in Istanbul, Marc Jones in London Writing by Dominic Evans; Editing by Kirsten Donovan

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