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Turkey sparks speculation on rate cut with shift to focus on base prices

By on September 8, 2021 0

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Turkey’s central bank has reoriented its policy towards a more restricted set of base prices amid accelerating inflation, paving the way for a cut in interest rates demanded by President Recep Tayyip Erdogan. The lira has fallen.

Governor Sahap Kavcioglu has pledged to keep the benchmark interest rate above inflation, but it has become increasingly difficult to stick to this direction as overall price hikes have climbed. sharply. Instead, by prioritizing core inflation, which eliminates volatile elements like food and energy, the central bank has given itself more leeway to avoid raising its key rates, or even reducing them.

As headline inflation accelerated again in August to reach 19.25% per annum, above the benchmark interest rate of 19%, core inflation fell by almost 50 points base at 16.76%.

“The extraordinary conditions, especially due to the pandemic, increase the importance of core inflation indicators,” Kavcioglu said in a speech in Ankara on Wednesday.

Supply bottlenecks as economies recover from the pandemic are causing headaches for policymakers around the world.

“Overall, when the stance of monetary policy is determined, the basic indicators excluding transient factors from areas outside the influence of monetary policy are taken as the basis,” he said. “Central banks and policymakers monitor changes in food prices, changes in core inflation and the impact of accelerating inflation on inflation expectations.”

Kavcioglu, who held the benchmark unchanged for a fifth meeting last month, faced calls from Erdogan for a rate cut as early as this month. He is the fourth central bank governor since 2019, with the president sacking his three immediate predecessors for hardening politics too much.

The president, whose ruling AK party has based its electoral success for decades on rapid levels of economic growth, preaches the unorthodox doctrine that higher interest rates stimulate prices rather than contain them. When the economy sank during the pandemic, support for Erdogan and his party plummeted.

The governor’s change described on Wednesday is aimed at expanding “very narrow leeway to cut interest rates,” said Piotr Matys, senior currency analyst at InTouch Capital Markets Ltd.

But, he warned, the monetary authority “does not have a sufficiently strong credibility to control the narrative and impose on the market its view that core inflation is more important than the aggregate measure at the time. of the definition of monetary policy “.

The pound fell 1.6% after the governor’s speech and was trading down 1.3% to 8.4631 per dollar at 12:27 p.m. in Istanbul.

“Essentially, the market is sending Governor Kavcioglu a very strong signal that he could make a costly political mistake,” said Matys.

The currency is down more than 14% since Kavcioglu’s appointment in March.

(Updates with commentary and graphic.)

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