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Erdogan vows to tame Turkish inflation as scepticism grows

Reuters . Ankara
13 Jan 2022 13:58:42 | Update: 13 Jan 2022 14:18:08
Erdogan vows to tame Turkish inflation as scepticism grows
Turkish lira banknotes are pictured at a currency exchange office in Istanbul, Turkey August 13, 2018. — Reuters Photo

President Tayyip Erdogan promised on Wednesday to tame Turkey's surging inflation, which hit 36 per cent last month, but economists predicted it could push much higher, piling further pressure on the battered lira currency.

The lira shed 44 per cent of its value in 2021, its worst performance in Erdogan's near two decades in power.

It stood at 13.31 against the dollar at 1705 GMT, up from Tuesday's close of 13.8. Earlier on Wednesday it had rallied as far as 4.7 per cent to 13.15, its strongest level in more than a week, though it was not immediately clear why it had firmed so much.

Thanks in part to costly state interventions in the currency market and to government measures that helped calm a full-blown crisis last month, the lira had largely held in a 13.7-13.94 range since last Thursday.

Speaking in parliament, Erdogan said Turkey was protecting its economy against what he called attacks and had taken under control "foreign financial tools that can disrupt the financial system".

"The swelling inflation is not in line with the realities of our country," Erdogan said, adding that the government's measures would soon soften the burden of "unjust" price hikes.

Under pressure from Erdogan, who seeks higher growth by boosting production and exports, the central bank has slashed its policy rate by 500 basis points to 14per cent since September. It holds its next rate-setting meeting on January 20.

Goldman Sachs said in a research note it expected annual inflation to exceed 40per cent in January, after which it could surpass 50per cent and remain elevated until the end of the year, when base effects would lower it to around 33 per cent.

"The deeply negative real rates and the high level of loan growth are likely to keep inflation elevated and continue to put pressure on the lira," the Wall Street bank said.

Economic growth

Despite the recent market volatility, Turkey's economy is estimated to have grown by a hefty 9.5 per cent in 2021, the World Bank said in its latest Global Economic Prospects report, as it rebounded from the coronavirus pandemic and related lockdowns.

But the bankalso forecast that growth would slow to 2 per cent this year and 3.0per cent in 2023. In its previous report last June, it had seen growth of 5 per cent in 2021 and 4.5 per cent in both 2022 and 2023.

Turkey's $720-billion economy grew 0.9 per cent in 2019 and 1.8 per cent in 2020, weighed down by a recession triggered by a separate currency crisis and later by the pandemic.

After the lira slumped to a record low of 18.4 against the dollar in late December, Erdogan announced a scheme to encourage savers to convert foreign exchange deposits, compensating depositors for any losses due to lira weakness.

On Tuesday Turkey added corporate accounts to the scheme, which the Treasury says has attracted some 108 billion lira ($7.8 billion) of deposits.

Goldman Sachs said it expected Turkish authorities to attempt "more administrative and regulatory measures" to curb inflation before making an eventual monetary policy U-turn.

But Carlos de Sousa, EM debt portfolio manager at Vontobel Asset Management, said he did not see rate hikes any time soon.

"This time is different. Erdogan has finally got tired (of having high interest rates)," he said.

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