Turkey cenbank chief says policy is tight enough; lira tumbles

Ankara: The Turkish lira took one of its biggest tumbles of the year on Wednesday over speculation that the central bank was about to cut rates despite soaring inflation.

Turkey´s annual rate of inflation accelerated to 19.25 percent last month -- the highest in two years and above the central bank´s benchmark interest rate of 19 percent.

The central bank has been vowing for months to keep real interest rates positive so that Turks are not incentivised to spend money instead of placing them in their accounts.

That would require it to hike its policy rate to at least 19.5 percent at its next policy meeting on September 23.

But central bank governor Sahap Kavcioglu told investors that consumer prices were expected to drop in the months ahead and the bank will now use "core" inflation -- which is below 17 percent after excluding volatile items such as food and fuel -- in future decisions.

"Extraordinary conditions that have arisen due to the pandemic have increased the importance of core inflation indicators," Turkish media quoted Kavcioglu as saying.

"While determining the global monetary policy stance, basic indicators excluding temporary factors arising from areas outside the sphere of influence of monetary policy are taken as a basis."

Governor Kavcioglu said the current 19 percent policy rate is tight enough to bring inflation down in the fourth quarter, suggesting monetary easing is on the way and setting off a plunge in the lira.

Speaking at a German-Turkish Chamber of Trade and Industry meeting, he stressed that the core inflation measures - which are lower than headline inflation - are increasingly important as the bank sets policy amid fallout from the pandemic.

"I can say that Turkey's monetary policy stance is tight enough to decrease inflation despite rising global inflation," Kavcioglu said.

Annual inflation jumped more than expected to 19.25% in August, above the central bank's policy rate and its highest level in more than two years, maintaining pressure for tight monetary policy.

"We think inflation will enter a falling trend in the final quarter," Kavcioglu said. He added that while food inflation has jumped above historic trends, to nearly 30% in August, non-food measures should stay below headline inflation through year end.

Kavcioglu also said that high interest rates on loans limit Turks' access to credit.

He said that while there was room to improve on inflation and foreign currency reserves, data shows that exports and services are boosting economic growth.

The Turkish lira fell by as much as 1.5 percent against the US dollar and was trading around the 8.45 mark on Wednesday afternoon.

Turkey´s central bank is nominally independent but has been under constant pressure from President Recep Tayyip Erdogan to lower interest rates.

The Turkish leader has fired three central bank governors since 2019 because they were either raising borrowing costs or not lowering them rapidly enough.

Erdogan is famous for subscribing to the unorthodox belief that high interest rates cause high inflation instead of tamping it down by hiking the cost of doing business.

Kavcioglu has kept the bank´s policy rate unchanged for five months and had previously vowed to focus on fighting inflation.

But Erdogan has indicated that he expects borrowing costs to start coming down quickly to help stimulate growth.

BlueBay Asset Management analyst Timothy Ash said Kavcioglu´s comments showed that his "promise to keep positive real interest rates means nothing really from a market perspective".

"He is obviously determined not to hike rates if in any way he can get away with it, and will cut at the very earliest opportunity," he said in an email to clients.

Turkey's economy has demonstrated high resilience in the face of external shocks and what many analysts view as years of mismanagement.

Gross domestic product grew by 1.8 percent despite the coronavirus pandemic in 2020 and is expected to expand by at least eight percent this year.

But analysts warn that this rapid growth and focus on state lending creates ripe conditions for painful price increases that hurt people's daily lives.

Official data show food and non-alcoholic beverage prices jumping 29 percent in annual terms in July.

"Although Turkey is among the world´s fastest growing economies, according to official figures, and its GDP has long since surpassed pre-pandemic levels, the authorities are loath to let growth cool," the Oxford Economics consultancy said in a research note. "These developments will reinforce price and financial stability risks."