The head of the Turkish cenbank said the policy was strict enough; read tumbles
Ankara: The Turkish lira suffered one of its biggest drops of the year on Wednesday due to speculation the central bank was set to cut rates despite surging inflation.
Turkey’s annual inflation rate accelerated to 19.25% last month, the highest in two years and above the benchmark central bank interest rate of 19%.
The central bank has been pledging for months to keep real interest rates positive so that Turks do not have an incentive to spend money instead of putting it in their accounts.
That would force it to raise its key rate to at least 19.5% at its next political meeting on September 23.
But central bank governor Sahap Kavcioglu told investors consumer prices are expected to fall in the coming months and the bank will now use “core” inflation – which is below 17% after excluded volatile items such as food and fuel – in future decisions. .
“The extraordinary conditions that have occurred due to the pandemic have increased the importance of core inflation indicators,” Kavcioglu said, quoted by Turkish media.
“In determining the direction of global monetary policy, basic indicators excluding temporary factors resulting from areas outside the sphere of influence of monetary policy are taken as a basis.”
Governor Kavcioglu said the current 19% policy rate is tight enough to bring inflation down in the fourth quarter, suggesting ongoing monetary easing and triggering a fall in the pound.
Speaking at a meeting of the German-Turkish Chamber of Commerce and Industry, he stressed that measures of core inflation – which are lower than headline inflation – are increasingly important as that the bank sets its policy amid the fallout from the pandemic.
“I can say that Turkey’s monetary policy is tight enough to reduce inflation despite rising global inflation,” Kavcioglu said.
Annual inflation jumped more than expected to 19.25% in August, above the central bank’s key rate and its highest level in more than two years, keeping the pressure on for tight monetary policy.
“We believe that inflation will enter a downward trend in the last quarter,” Kavcioglu said. He added that if food inflation has exceeded historical trends, at nearly 30% in August, non-food measures are expected to remain below headline inflation until the end of the year.
Kavcioglu also said that high interest rates on loans limit Turks’ access to credit.
He said that while it was possible to improve inflation and foreign exchange reserves, the data shows that exports and services drive economic growth.
The Turkish lira lost as much as 1.5% against the US dollar and was trading around the 8.45 mark on Wednesday afternoon.
Turkey’s central bank is nominally independent but has come under constant pressure from President Recep Tayyip Erdogan to cut interest rates.
The Turkish leader has fired three central bank governors since 2019 because they were raising borrowing costs or not reducing them quickly enough.
Erdogan is famous for subscribing to the unorthodox belief that high interest rates cause high inflation instead of reducing it by increasing the cost of doing business.
Kavcioglu kept the bank’s key rate unchanged for five months and previously pledged to focus on fighting inflation.
But Erdogan has indicated that he expects borrowing costs to start coming down quickly to help spur growth.
BlueBay Asset Management analyst Timothy Ash said Kavcioglu’s comments showed that his “promise to keep real interest rates positive means nothing from a market perspective.”
“He’s obviously determined not to raise rates if he can get away with it in any way, and he will drop as soon as possible,” he said in an email to clients.
The Turkish economy has shown great resilience in the face of external shocks and what many analysts see as years of mismanagement.
Gross domestic product rose 1.8% despite the coronavirus pandemic in 2020 and is expected to increase by at least 8% this year.
But analysts warn that this rapid growth and focus on government lending is creating conditions for painful price increases that hurt people’s daily lives.
Official data shows that the prices of food and non-alcoholic drinks jumped 29% in annual terms in July.
“Although Turkey is one of the fastest growing economies in the world, according to official figures, and its GDP has long exceeded pre-pandemic levels, authorities are loath to let growth slow down.” Oxford Economics consultancy said in a research note. “These developments will reinforce the risks associated with prices and financial stability.”