Central bank under new governor sticks to interest rate

THE CENTRAL Bank of the Republic of Turkey (CBRT) left its benchmark interest rate unchanged in the first policy meeting under its new governor yesterday. The Monetary Policy Committee (MPC) kept the one-week repo rate at 19% and the bank pledged to use all available instruments to ensure the primary objective of price stability.

In a statement, the bank did not repeat last month’s pledges to deliver more rate hikes if needed and to “decisively” maintain a tight monetary policy “for an extended period” to address inflation.

Long an issue for the economy, the annual inflation edged higher in March to above 16%, signifying the need to maintain the tight monetary policy, while producer prices surged beyond 31%.

“Demand and cost factors, supply constraints in some sectors, and high levels of inflation expectations continue to pose risks to the pricing behavior and inflation outlook,” the bank said.

The policy committee, under new Governor Şahap Kavcıoğlu, said the interest rate “will continue to be determined at a level above inflation to maintain a strong disinflationary effect until strong indicators point to a permanent fall in inflation.” The decision came in line with forecasts of most analysts in Reuters, Bloomberg and Anadolu Agency (AA) surveys.

IN THE Reuters poll, all but two of 19 economists forecast the bank would keep its one-week policy rate unchanged this week, before likely easing after mid-year. One predicted a cut to 18.50% and another to 17%.

Among 20 economists surveyed by AA, 19 predicted no change and one predicted a rise of 100 basis points.

The CBRT already lifted its benchmark policy rate – the one-week repo rate – from 10.25% to 19% under former chief Naci Ağbal.

Ağbal was removed on March 20, after about five months on the job and two days after the higher-than-expected 200 basis points rate hike.

He was replaced by Kavcıoğlu, who has said tight monetary policy is needed for now, given high inflation.

He has said the bank remains strongly committed to the 5% inflation target by 2023.

President Recep Tayyip Erdoğan last week reiterated determination to bring inflation down to single digits. Erdoğan also said they sought lower borrowing costs. A closely-watched survey by the bank last Friday showed that expectations for the annual consumer price inflation have ticked higher, increasing pressure on the central bank’s new governor to maintain the tight policy.

Inflation is expected to peak at as high as 18% in April before dipping afterward.

Kavcıoğlu has pledged to keep the policy rate above inflation until it was clearly on a permanent downward trajectory. The governor last month dismissed “prejudiced” expectations of an early rate cut in April or the following months.

The decision by the central bank “was accompanied by reassuring language that the MPC, with new governor Şahap Kavcıoğlu in charge, will take the inflation target seriously,” William Jackson, chief emerging markets economist at Capital Economics, told Reuters.