Middle East

Turkey cenbank chief says policy is tight enough; lira slides

3 minute read

People shop at a food market in Istanbul, Turkey, February 11, 2019. REUTERS/Murad Sezer

  • Kavcioglu stresses importance of core inflation to policy
  • Lira weakens on prospect of monetary easing
  • Central bank policy meeting to be held on Sept. 23
  • Headline inflation was 19.25% in August

ISTANBUL, Sept 8 (Reuters) - Turkish Central Bank Governor Sahap Kavcioglu said on Wednesday the current 19% policy rate is tight enough to bring inflation down in the fourth quarter, suggesting monetary easing is on the way and setting off a plunge in the lira.

Speaking at a German-Turkish Chamber of Trade and Industry meeting, he stressed that the core inflation measures - which are lower than headline inflation - are increasingly important as the bank sets policy amid fallout from the pandemic.

"I can say that Turkey's monetary policy stance is tight enough to decrease inflation despite rising global inflation," Kavcioglu said.

Annual inflation jumped more than expected to 19.25% in August, above the central bank's policy rate and its highest level in more than two years, maintaining pressure for tight monetary policy. read more

Despite high inflation, which has been in double digits for most of the last four years, the bank is expected to begin cutting rates in coming months due in part to pressure from President Tayyip Erdogan for stimulus.

The next policy meeting is set for Sept. 23.

"We think inflation will enter a falling trend in the final quarter," Kavcioglu said. He added that while food inflation has jumped above historic trends, to nearly 30% in August, non-food measures should stay below headline inflation through year end.

The lira took its biggest tumble since May, weakening as much as 1.5% to 8.48 against the dollar after the rare public speech from the bank governor, whom Erdogan appointed in March.

The speech "created volatility in the exchange rate as a rate cut as soon as Sept. 23 might be on the agenda if the bank takes a slight deceleration in core inflation as permanent," said Spinn Consulting founding partner Ozlem Derici Sengul.

GETTING DOVISH

The central bank has kept its policy rate at 19% since March and repeatedly promised in recent months to keep it above the inflation rate.

However, on conference calls with investors last week, investors told Reuters that Kavcioglu did not repeat that hawkish pledge, and said they interpreted that as a shift that could pave the way to earlier rate cuts. read more

Again on Wednesday he did not repeat that pledge, while stressing the significance of core inflation.

Reuters Graphics

"The extraordinary conditions brought on by the (COVID-19) outbreak increase the importance of core inflation indicators, that allow the main trend of inflation to be measured adjusted for short-term volatilities," he said.

Annual core "C" inflation stood at 16.76% in August, down from 17.22% in July.

Kavcioglu also said that high interest rates on loans limit Turks' access to credit.

He said that while there was room to improve on inflation and foreign currency reserves, data shows that exports and services are boosting economic growth.

Additional reporting by Ebru Tuncay; Writing by Daren Butler; Editing by Jonathan Spicer

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