Turkey's central bank faces calls to turn hawkish words into action

By Nevzat Devranoglu and Jonathan Spicer

ANKARA, March 4 (Reuters) - Market pressure is building on Turkey's central bank to follow up its hawkish talk with an interest rate increase after inflation has edged up and a global bond market rout has wiped out what had been a strong rally in the lira this year.

Even with a 17% policy rate - the highest of any large economy - Turkish real rates have narrowed after inflation rose more than expected to 15.6% last month.

Turks have responded by hanging on to near-record levels of safer hard currencies. Investors, spooked by rising U.S. yields, have dumped riskier emerging-market assets, including the particularly volatile lira, which is down 7% in two weeks.

After sharp hikes, the central bank under new chief Naci Agbal has held rates steady since December but promised to tighten more if needed. It predicted inflation would rise through April before dipping to single digits by the end of the year.

The bank repeated that message in investor calls on Wednesday.

But several investors, traders and bankers told Reuters Agbal should walk the walk at a March 18 policy meeting and lift rates, to reinforce his assertion since November that he will finally slay Turkey's chronically double-digit inflation.

"If the recent negative outlook in exchange rates continues and a deterioration in inflation expectations is observed, we think a 50-100 basis point rate hike may be carried out on March 18," said QNB Finansbank's chief economist Erkin Isik.

An FX trader said inflation pressure raises the prospect of a rate hike, which just last week was seen as highly unlikely.

"I expect a 100-point hike, preferably this month," he said, requesting anonymity. "If not, the real rate will have to stay too low for a while" and may hurt the lira.


A sliding currency adds to trade-related inflation pressure for Turkey's import-reliant economy.

Since Agbal was appointed in November, the lira TRYTOM=D3 had jumped 20% from record lows, in a rally that was cut short last week when global markets sold off. It hit 7.48 against the dollar on Thursday, weaker than its end-2020 level of 7.44.

Another investment risk for Turkish assets is President Tayyip Erdogan, who abruptly fired the last two bank chiefs after short stints. He regularly calls for rate cuts, raising prospects Agbal may not last long in the job.

On the conference calls with investors, central bank officials stressed that rising soft commodity and energy prices, as well as supply constraints, are pushing inflation up, participants said.

But the bank stuck to a year-end inflation forecast of 9.4% and repeated it would finally hit a 5% target by the end of 2023.

"After the meeting ... we have the impression that no action will be taken against those developments (and) we expect the policy rate to be kept constant," Oyak Securities said in a note. In that case, and if volatility remains high and fund inflows low, Oyak said, it could lift its inflation forecasts.

NEWSMAKER-Back-to-basics Agbal hopes this time is different at
Turkey's central bank

Writing by Jonathan Spicer; editing by Daren Butler, Larry King

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