Turkish lira tumbles after bank argues real rates positive, signals no hike

Turkey’s lira slid after the central bank said interest rates, net of inflation, were positive in the country even after consumer price inflation (CPI) climbed to 19.25 percent, exceeding the bank’s benchmark rate of 19 percent.

Goveror Şahap Kavcıoğlu, under pressure from President Recep Tayyip Erdoğan to cut borrowing costs since his appointment in March, made the comments during a speech to businessmen on Wednesday. He said the bank looked to so-called core inflation, which stood at 16.8 percent last month, when setting monetary policy.

The lira was trading down 1.6 percent at 8.47 per dollar after Kavcıoğlu spoke.

Turkey’s central bank has traditionally explained its monetary policy by using CPI as the leading indicator. In a quarterly inflation report at the end of July, it estimated that CPI would slow to 14.1 percent by the end of the year. The bank’s benchmark monthly poll of financial market participants predicts year-end inflation of 16.3 percent. It does not include an estimate for core inflation.

“Turkey has become one of the rare countries that have provided significant real interest rates since the beginning of 2021, as a result of the monetary tightening that it realised earlier that was stronger than peer countries,” Kavcıoğlu said.

Kavcıoğlu, who has kept interest rates unchanged even as inflation accelerated, is Turkey’s third central bank governor to be appointed in less than three years. His predecessor Naci Ağbal was sacked after he hiked interest rates from 10.25 percent to control inflation during a four-month tenure. Erdoğan insists that high interest rates are inflationary, pointing to the larger costs that they create for businesses.

"Central banks and policymakers monitor developments in food prices, core inflation developments and the impact of inflation on inflation expectations," the governor said.

“He (Kavcıoğlu) 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,” Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said in e-mailed comments.

“Hard to see inflation falling in any meaningful way under this monetary policy setting,” he said.

In a presentation accompanying his speech on Wednesday, Kavcıoğlu compared CPI and interest rates in Turkey with those of other countries, stating that policy interest rates remained at low levels in developed economies. He did not include figures for other emerging markets.

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