Jun 26 2018

Turkish bank must enforce inflation goal – adviser

Turkey’s central bank must enforce a goal for inflation and re-instill confidence in investors that it will achieve it, said Mike Harris, founder of Cribstone Strategic Macro, which specializes in advice on emerging markets.

The central bank’s current policies of reacting to movements in the lira threaten to cause a financial crisis in the country, Harris told BloombergHT television. Policymakers should set an inflation goal of, say, 7 percent, and pursue the objective convincingly, he said. While the bank says its current target is 5 percent, inflation stood at 12.2 percent in May and is set to accelerate further.

“The central bank should tell the market what it is trying to achieve and behave as though it is trying to achieve that,” Harris said.

The Turkish central bank has raised interest rates by a total of 500 basis points this year to 17.75 percent as it reacted to a slump in the lira’s value against the dollar. Investors have criticized the bank for being too slow to react to market developments, acting reactively rather than proactively, and of pandering to the political wishes of President Recep Tayyip Erdoğan, who wants to stimulate more economic growth and believes interest rates are inflationary.

The government should also lift a state of emergency in the country, which Erdoğan imposed following a failed military coup in July 2016, to revive investor confidence in the economy, Harris said.

After winning another five-year term as president on Sunday, Erdoğan will have enhanced powers over economic management and should bring in technocrats who can give sound advice and who are not afraid to talk openly to him, Harris said. But if people start “walking on eggshells” at any potentially growth-negative policies then Turkey is nothing more than a short-term bet, he said.