Turkey: Risk of a premature policy-loosening – ABN AMRO

In Turkey, there is a risk of a premature policy-loosening, which would ultimately result in another round of lira destabilisation, according to Nora Neuteboom, economist at ABN AMRO.

Key Quotes

“Given November’s lower than expected inflation of 21.6%, inflation may undershoot the central bank’s year-end target of 20.8%. Erdogan may also put pressure on the central bank to lower interest rates ahead of the local elections in late March. As the central bank wants to support growth by stimulating credit growth, it may decide to loosen monetary policy in early 2019.”

“As we expect inflation to remain above 20% at the start of 2019, any such loosening will be perceived as premature and put further pressure on the lira. We consider the probability of this risk to be low, given that the central bank stated in its latest communication on 13 December that risks to price stability continued to prevail despite the recent improvement in the inflation outlook. The central bank also repeated its message that, if needed, further monetary tightening will be forthcoming.”