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10 February 2020

President Erdogan to get his wish on rates, says Goldman

Goldman said that inflationary developments will eventually limit the extent to which Turkey’s central bank can reduce rates and rates will continue to rise in the medium term as global financial conditions tighten

Turkey's President Recep Tayyip Erdogan/Bloomberg

by Bloomberg

Goldman Sachs Group said that Türkiye Cumhuriyet Merkez Bankası (TCMB) will be able to bring interest rates to single digits within months as demanded by President Recep Tayyip Erdogan before they start to rise again next year as price pressures bubble up,

In a report, Goldman Sachs stated that the authorities will prioritise growth and reduce the policy rate as much as possible without destabilising the lira.

“Recent inflation dynamics and growth in money aggregates, in our view, also increase the risk of renewed lira volatility,” said Goldman.

The Turkish central bank is not done yet, even after shocking much of the market with an easing cycle that is more than halved Turkey’s benchmark since July 2019 to 11.25 per cent. Erdogan has been promising to deliver rates in single digits this year and believes inflation will follow suit—a reflection of his unorthodox view that lower borrowing costs are more effective at slowing prices.

But with Turkish rates turning negative when adjusted for realised inflation, the lira is coming under more strain.

Although Goldman is maintaining a nine per cent price growth at the end-2020 per cent, the bank warned that a build-up of inflationary risks may get in the way of monetary easing.

An uptick in the core index, which strips out the impact of volatile items such as food and energy, and services inflation above 12 per cent might mean that price growth will end up settling in the low teens, rather than high single digits.

Last month TCMB kept its projections for inflation at 8.2 per cent for 2020 and 5.4 per cent by the end of 2021. On an annual basis, it accelerated faster than forecast for a second month, reaching 12.2 per cent in January 2020.

RELATED STORIES: Türkiye Cumhuriyet Merkez Bankası Goldman Sachs President Recep Tayyip Erdogan





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