Pressure mounts on Turkey’s central bank as producer prices surge

Turkey’s central bank is under increasing pressure to raise interest rates after a jump in producer price inflation to the highest level in two years threatened to further undermine confidence in the embattled lira.

Manufacturers raised their prices at 31 percent annually in March, the highest rate since January 2019. The weaker lira, the cost of commodities and low consumer demand are causing firms to charge more for goods, the central bank said in an assessment of the inflation data on Tuesday.

Monetary policymakers in Turkey are struggling to keep a lid on price increases while seeking to satisfy the demands of President Recep Tayyip Erdoğan, who says high interest rates are a cause of inflation. Erdoğan shocked investors last month by replacing the bank’s governor Naci Ağbal after he raised borrowing costs.

The central bank next meets on interest rates on April 15.

Consumer price inflation accelerated to 16.2 percent last month from 15.6 percent in February, the Turkish Statistical Institute said on Monday. It is expected to nudge higher, perhaps significantly, in April, according to economists’ predictions.

Investors are calling on the central bank to hike interest rates to deal with the surging prices - Turkey has the highest inflation rate in major emerging markets after crisis-hit Argentina.

The central bank is now headed by Şahap Kavcıoğlu, a former employee of a state-run bank and a columnist for the Islamist Yeni Safak newspaper who has sympathised with Erdoğan’s unorthodox theory on interest rates. Higher interest rates are typically used by central banks around the world to contain inflation.

“A normal, orthodox central banker would hike again given the March inflation data,” Tim Ash, a senior emerging markets strategist at BlueBay Asset Management in London, said in comments after the inflation data was published.

Core inflation, which strips out volatile items such as oil and gold, climbed to 16.9 percent last month and now sits above the headline consumer price inflation figure.

Kavcıoğlu, who like Ağbal has pledged to slow inflation to a 5 percent target, held conference calls with local and foreign investors on Thursday to reassure them about the central bank’s monetary policy.

The lira has lost about 11 percent of its value since Erdoğan ousted Ağbal, an ex-finance minister, as governor in early March. The currency had strengthened to 7.21 per dollar just prior to Ağbal’s departure. It traded down 0.8 percent at 8.16 per dollar on Tuesday.

A participant in one of Thursday’s conference calls told Ahval that Kavcıoğlu read from a pre-prepared statement. He did not address investors’ questions, which were answered by his deputy governors instead. “It’s like they don’t trust him,” the participant said.

Increases in consumer prices traditionally occur with a lag to any sharp gains in producer price inflation in Turkey.

Annual producer price rises more than doubled to 25 percent between January and July 2018, when a currency crisis ripped through financial markets. It took consumer price inflation three more months to reach such levels. The central bank was then forced to hike interest rates sharply to defend the lira and rein in the price increases.

The central bank is expected to keep interest rates on hold at next week's meeting, said Nihat Özdemir, a top Turkish businessman who has won several large construction contracts under the Erdoğan government, Dünya newspaper reported on Tuesday.