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April 16, 2021

Turkey’s central bank holds interest rate at 19 percent


April 16, 2021

By Monitoring Desk

Ankara: Turkey´s central bank on Thursday held its main interest rate at 19 percent in the first decision since President Recep Tayyip Erdogan sacked its market-friendly governor and replaced him with a party loyalist.

The bank said it had "decided to maintain the tight monetary policy stance by keeping the policy rate unchanged," adding that it intended to keep it above the annual rate of inflation, which came in at 16.2 percent last month.

"The policy rate will continue to be determined at a level above inflation to maintain a strong disinflationary effect," it said in a statement.

The lira held steady against the dollar minutes after the decision was announced, but economists said the central bank was opening the door to future rate cuts.

Erdogan sacked former governor Naci Agbal after he used his four-month term to aggressively raise rates to fight inflation, and replaced him with former ruling party lawmaker Sahap Kavcioglu last month.

Erdogan gave no explanation for his decision, but Kavcioglu has subscribed to the Turkish leader´s unconventional belief that high interest rates cause inflation instead of tamping it down.

"The language also suggests that they are looking for opportunities to lower interest rates," said Capital Economics analyst William Jackson.

Kavcioglu is the fourth central bank chief Erdogan has appointed since July 2019.

John Hardy, FX strategy head at Saxo Bank, said the currency had weakened on Thursday because Agbal’s pledges were scrapped.

“Any daylight they see, they are going to want to cut rates. Holding them here (today) is just an acknowledgment they can’t get away with it for now,” he said.

Earlier this month, Erdogan said he was "determined" to see the interest rate return to single digits, and to "reduce inflation to single digits".

But consumer prices keep rising, and have now reached their highest level since July 2019, when Turkey was suffering from economic effects of a standoff with the United States the previous year.

In January, the bank said it expected inflation to be 9.4 percent by the end of 2021.

Former ruling party economy minister Ali Babacan, who now leads an opposition party, suggested Agbal may have been sacked over plans to investigate what happened to the country´s foreign exchange reserves worth nearly $130 billion.

The bank is believed to have used the money to support the lira while keeping interest rates low in 2019-2020.

The issue has picked up steam in the past few days after the main opposition Republican People´s Party (CHP) started a campaign asking: "Where is the $128 billion?"

The lira has lost more than eight percent in value against the US dollar since the start of 2021, despite a rally earlier this year as investors optimism in Turkey renewed with Agbal´s orthodox thinking.

Last month, the central bank under Agbal had raised rates by a more-than-expected 200 basis points to levels last touched in mid-2019 to dampen inflation and support the currency.

Before taking the job, Kavcioglu had said such a policy was wrong for Turkey and also espoused Erdogan’s unorthodox view that high rates cause inflation.

Erdogan has repeatedly called for monetary stimulus to help the economic rebound. He has fired three bank chiefs in two years, eroding monetary credibility.

The lira plunged 15 percent immediately after Agbal’s dismissal before a rebound, and foreign investors dumped the most bonds and stocks in 15 years over the following week.

Depreciation boosts inflation via imports, delaying any rate cut plans, analysts say.

Inflation is expected to reach as much as 19 percent before mid-year. Yet few analysts see another rate hike given Erdogan’s repeated calls for stimulus - including one this month for single-digit rates.

The change in tone under Kavcioglu reflects “preparation being made to cut the policy rate,” said Haluk Burumcekci of Istanbul-based Burumcekci Consulting.

Ratings agencies say premature easing could again hammer the lira and raise risks of a balance-of-payments crisis given Turkey’s depleted FX reserves and its $160 billion in short-term foreign debt.

Citing sources, media reported Erdogan ousted Agbal in part because he was uncomfortable with the bank’s investigation into some $128 billion in FX sales undertaken during his son-in-law Berat Albayrak’s stint as finance minister.