Turkish Central Bank Promises Tight Policy to Curb Inflation

(Bloomberg) --

Turkey’s central bank raised its inflation projections for the end of this year and pledged to continue with elevated borrowing costs after the appointment of a new chief sparked a market slide.

The lira rallied as Governor Sahap Kavcioglu said the current inflation outlook requires him to maintain a tight monetary policy stance with “great determination and patience.”

Consumer-price growth will finish the year at 12.2%, compared with a previous forecast of 9.4%, he said Thursday, unveiling the first inflation report of his central banking career.

Below are highlights of his statement:

• Consumer inflation is expected to have peaked in April; central bank will use all tools at its disposal to achieve price stability
• Policy rate will remain above “actual and expected rate of inflation” to maintain a strong, disinflationary impact
• Inflation rate to decline to 7.5% by the end of 2022, also an upward revision from 7%
• End-2020 food inflation estimated at 13%, compared with 11.5% previously
• The central bank’s 2021 average oil price forecast raised to $64.4 per barrel from

The lira strengthened as much as 0.7% on Kavcioglu’s remarks and was trading 0.4% higher at 8.1650 per dollar at 12:25 p.m. in Istanbul.

The governor’s pledge to keep the policy rate above actual and expected inflation is important guidance that can help bring down price pressures, according to Enver Erkan, chief economist at Istanbul-based Tera Yatirim.

“On the other hand, we see that Kavcioglu doesn’t think there’s need to raise interest rates as he sees inflation peaking in April,” he said.

Kavcioglu was appointed last month by President Recep Tayyip Erdogan, who breaks with economic orthodoxy in believing higher interest rates spur rather than curb inflation. The Turkish leader sacked Naci Agbal, brought in as governor months earlier to steady the currency, after he’d delivered a 200-basis-points hike in the benchmark.

That increase made Turkey’s key rate adjusted for inflation one of the world’s highest at 19%, and was criticized by Kavcioglu, a professor of banking, as a threat to economic growth.

What Our Economists Say:

“The unexpected firing of Naci Agbal as central bank governor on March 22 has turned sentiment against the lira and led to a sharp depreciation of the currency.”

--Ziad Daoud, Bloomberg Economics. Read more: Governor’s Dismissal Was a Turning Point for Turkish Lira

The new governor left the one-week repo unchanged in his first monetary policy decision this month, but removed a pledge to deliver additional tightening. The central bank said in a summary that the benchmark would be kept above the rate of consumer inflation until its 5% target is reached.

Still, the lira has weakened more than 11% against the dollar under Kavcioglu. Erdogan said the government remained determined to both reduce inflation and lower interest rates to single digits.

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