ISTANBUL: New governor Naci Agbal does not expect Turkey’s central bank to begin considering cutting interest rates from 17% until much later this year given upward pressure on already high inflation, and rate hikes are still a possibility, he told Reuters.
In his first interview since taking the reins three months ago, Agbal said the central bank intends to move ahead of the market, including swiftly hiking rates if there is any sign that inflation, now 15%, might drift higher than expected.
His comments, including the revelation that Turkey is no longer seeking currency swap lines with foreign counterparts, could reinforce a growing view among investors that the bank is in no rush to start easing policy despite calls for lower rates from Turkish President Tayyip Erdogan.
“It does not seem possible to put interest rate cuts on the agenda for a long time this year, ” Agbal said, noting that consumer prices are set to edge higher for a few months before slowly declining to the bank’s forecast of 9.4% by year-end.
“If any new data that we come across indicates a risk of deviating from the medium-term target path in inflation expectations and pricing behaviour, we will tighten further in advance, ” he said at the bank’s new headquarters in Istanbul.
Erdogan appointed Agbal as part of a shock leadership overhaul a day after the lira touched a record low in early November. The Turkish president also pledged a new market-friendly economic era.
The central bank has since hiked rates to 17% from 10.25% to battle inflation that has been stuck in double-digits for most of the last three years, giving Turkey the tightest monetary policy of any major developed or emerging market economy.
After years of avoiding Turkish assets, investors have begun edging back in, with some US$15bil in foreign inflows since November driving the lira up 15% and dramatically cutting gauges of market risk.
Yet concerns remain over whether Agbal can repair the bank’s tattered credibility and rebuild its foreign exchange reserves, seen as a country’s buffer against financial crises, which on a net basis fell last month to a quarter of their levels at the start of 2020 due to costly state interventions in currency markets.
Erdogan, who fired the last two central bank chiefs over policy disagreements, has repeated in recent weeks his long-held, unorthodox view that tight high interest rates cause inflation.
Some analysts doubt Agbal will be able to keep his hawkish pledge.
They generally expect the bank to start cutting borrowing costs from mid-year and say its inflation forecasts are too optimistic. — Reuters
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