Turkey’s central bank has left benchmark interest rates unchanged at its first rate-fixing meeting since the new governor was installed, but has indicated it could loosen policy if there are signs of declining inflation.
According to economists selected by Reuters and Bloomberg, the Monetary Policy Policy Committee, chaired by Sahap Kavisioglu, has set a one-week repo rate at 19 percent following his surprise appointment last month.
In a statement after the meeting, the policymakers reiterated their commitment to reduce inflation but dropped the previous administration’s indication of further austerity in the future. Cavioglu’s predecessor, Nassi Agabal, was ousted by President Recep Tayyip Erdogan in March amid rising expectations.
The statement from the committee said, “Inflation will continue to be set at a high level of inflation until inflation is permanently reduced and the medium-term target of 5 percent is achieved.”
Turkey’s inflation has been stuck at double-digit levels for most of the last three years; Consumer prices have risen more than 16 percent in the past month.
Cavicioglu, a former academic and newspaper columnist, hinted that despite arguing for Erdogan’s unpopular theory, he would not immediately undo the previous governor’s hawkish policies, driving inflation rather than cooling costs.
The change in leadership of the central bank has penalized the financial markets. The lira has lost a tenth of its value due to investors’ fears that the bank will lean towards lower rates from Erdogan to boost growth in the economy.
On Thursday, the lira lifted slightly to 8.1 against the US dollar.
The committee said it would keep real interest rates above inflation by changing its previous commitment to maintain a tight policy until inflation targets are met.
It recommended, “there is still significant comfort in cards,” said William Jackson, a major emerging market economist in the capital economy.
The decision showed that Cavioglu “will take the inflation target seriously. But the language also suggests they are looking for opportunities to cut interest rates, ”Jackson wrote in a note addressed to investors. “The statement called for keeping real interest rates above inflation. The one-week repo rate is 19 percent and inflation is at 16.2 percent, which already allows for a reduction. “
Erdogan said last week that he was determined to reduce both interest rates and inflation in single digits.
Kavisioglu is the fourth central bank governor in two years. Erdogan offered no reason to fire Agal, who rose to the post in four months, raising his tally by 7.755 percentage points.
The committee statement further stated that “all available instruments will continue to be used as scheduled in pursuance of the initial goal of price stability” and that recognized risks remain in inflation due to demand and cost and supply problems in certain sectors.
Barclays analysts said in a note: “The risk of premature cuts has increased significantly since today’s statement. We are not sure that the commitment to keep the policy rate above inflation is enough to meet anchor expectations. “
Adam Samson Additional Reporting