Erdoğan sets stage for higher inflation, lower growth in Turkey

Turkish President Recep Tayyip Erdoğan’s decision to replace the governor of the central bank last month is set to usher in a period of higher inflation and lower economic growth, Reuters reported on Wednesday citing economists.

Erdoğan’s sacking of highly respected former finance minister Naci Ağbal overnight on March 19 has led to a decline in the lira against the dollar of more than 10 percent, contributing to pressure on prices.

Inflation accelerated to 16.2 percent in March from 15.6 percent the previous month, the statistics office said this week. Economists say it may peak at as high as 18 percent in April or May and could nudge even higher.

Top international banks Goldman Sachs, JPMorgan and Citigroup have all raised their inflation forecasts for 2021 and say the central bank may have to keep interest rates higher for longer to rein in price increases, hitting economic output. In late March, Goldman lowered its outlook for growth this year to 3.5 percent from a previous 5.5 percent.  

“Recent events have clearly shot investor confidence in the country to pieces,” said Jason Tuvey, senior emerging markets economist at Capital Economics in London, according to Reuters. He slashed his economic growth forecast for 2021 to 4.8 percent from 6.8 percent before Ağbal was fired.

Foreign investors have sold about $1.9 billion of Turkish assets since Ağbal departed, the biggest drop in 15 years, Reuters said citing bank MUFG.

“The main risk to our forecasts is that the authorities may push for growth with premature rate cuts or an increase in lending,” Goldman said.

The lira traded down 0.3 percent at 8.15 per dollar on Thursday. It had reached 7.21 per dollar just prior to Ağbal's dismissal and hit a record low of 8.58 against the U.S. currency the day before his arrival in early November.