Turkey consumer confidence at 21-month high shows rate hikes not redundant

Consumer confidence in Turkey rose to the highest level since April 2019 this month, showing that the central bank’s decision to keep interest rates on hold on Thursday may be more to do with politics than the economy.

The central bank elected to leave its benchmark interest rate at 17 percent, citing the impact of consumer demand and recent currency weakness on the inflation outlook. It vowed to “maintain decisively the tight monetary policy stance for an extended period” in a statement accompanying the decision.

Confidence among consumers climbed to 83.3 in January, the second-highest level since a currency crisis in the summer of 2018, from 80.1 the previous month, according to data published by the Turkish Statistical Institute on Thursday. The increase was driven by improvements in the outlook for household finances and the general economic situation, the institute said, hours before the central bank met to decide on interest rates.

Inflation in Turkey accelerated to 14.6 percent in December from 14 percent the previous month. Economists say price increases are expected to accelerate in the first quarter of the year, bringing inflation closer to the central bank’s benchmark interest rate.

Central banks typically seek to rein in inflation by using higher interest rates to suppress demand among consumers for goods and services, which can drive up prices. The price of food and household goods led inflation higher in December.

But President Recep Tayyip Erdoğan, who has sacked two central bank governors in less than two years, said last week that interest rates should be cut to help reduce borrowing costs for businesses and bring down inflation.

Erdoğan appointed current central bank governor Naci Ağbal on Nov. 7. Monetary policymakers then raised interest rates from 10.25 percent at meetings in November and December.  

The central bank targets consumer price inflation of 9.4 percent by the end of this year. A central bank survey of financial institutions forecasts inflation of 11.2 percent by December.

(This story was corrected to show central bank met on rates on Thursday.)