Turkey's newly-appointed cenbank chief says April rate cut shouldn't be taken for granted

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Turkish Central Bank Governor Şahap Kavcıoğlu said markets shouldn’t take for granted that he’ll cut interest rates as soon as April, when he sets monetary policy for the first time since his surprise appointment.

“I do not approve a prejudiced approach to MPC decisions in April or the following months, that a rate cut will be delivered immediately,” Kavcıoğlu said in a written response to questions emailed by Bloomberg News, referring to monetary policy committee meeting next month.

“In the new period, we will continue to make our decisions with a corporate monetary policy perspective to ensure a permanent fall in inflation. In this respect, we will also monitor the effects of the policy steps taken so far,” he noted.

Kavcıoğlu was appointed on March 20 after President Recep Tayyip Erdoğan fired Naci Ağbal from the Central Bank, two days after a larger-than-expected rate increase. The selection fueled expectations for a quick reversal of Turkey’s monetary policy and triggered a sharp selloff in Turkish assets as investors concluded that policies that had briefly restored the lira’s fortunes had come to an abrupt end after angering the president.

But in his first interview since taking the job, Kavcıoğlu said he held a “strict adherence” to the bank’s 5% inflation target.

The Turkish lira extended gains on the news, rising as much as 1.1%, before trimming its advance to 0.6% as of 10 a.m. in Istanbul. It was still the best-performing emerging-market currency.

Erdoğan wants to keep rates as low as possible

In contrast to most central bankers around the world, Erdoğan believes higher interest rates fuel inflation, and wants them to be kept as low as possible. That preoccupation has seen the president fire three Central Bank governors in less than two years. Now, after his shock appointment, Kavcıoğlu is the latest to hold the post.

When asked about the Turkish monetary authority’s credibility, given the president’s strong influence and his ability to replace governors, Kavcıoğlu said the bank maintains “instrument independence” by law. He pledged to use all its tools as required by the inflation outlook and said he’d stick to the single-rate policy framework inherited from his predecessor.

Until Kavcıoğlu's predecessor started an aggressive tightening cycle in November, investors frequently criticized the bank for being too quick to undo tightening and too slow to respond to risks, most recently in August 2018 when the lira lost about a quarter of its value.

Kavcıoğlu, a former lawmaker for the ruling Justice and Development Party (AKP), served as a professor of banking at Marmara University in Istanbul and a columnist at the pro-government Yeni Şafak newspaper, which criticized the monetary authority’s latest interest-rate increase on its front page.

The new governor said, though, that he found it wrong to comment on earlier decisions of the Central Bank both “in principle and ethically.”

“We strictly adhere to the medium-term inflation target of 5% set jointly with the government, and I am aware of its importance of this for sustainable growth,” he said. “When determining the monetary policy stance, we will continue to take into account the realized and expected inflation as well as global capital flows, real yields in peer countries, and the portfolio preferences of residents.”

'Under free market conditions' 

In response to a question on how Turkey used its official reserves for nearly two years through 2020 to support the lira, the new Central Bank chief said, “exchange rates will be determined by supply and demand balance under free market conditions.”

Last year alone, Turkish banks spent more than $100 billion of the nation’s foreign reserves to support the currency, according to a report by Goldman Sachs Group Inc. That prompted calls by opposition lawmakers for a judicial probe into the official reserves, while Erdoğan's allies argued reserves were used to finance current-account deficit.

Turkey’s total gross reserves, including gold and money held by the central bank on behalf of commercial lenders, dropped 20% last year to $85.2 billion until Ağbal’s appointment in November, while net foreign-exchange reserves fell by more than half to $19.6 billion.

The Central Bank will try to amass foreign reserves when market conditions are right, Kavcıoğlu said, a policy priority he shares with Ağbal.

“The Central Bank may use reserve-boosting tools under appropriate conditions, with prior and proper communication thereof,” Kavcıoğlu said.