Turkish central bank governor Şahap Kavcıoğlu did not mention current interest rate policy and the lira’s record low levels against the dollar in a speech to a summit of finance industry professionals on Tuesday.
The central bank’s monetary policy committee surprised investors last week by cutting interest rates to 18 percent from 19 percent. The lira dropped to an all-time low of 8.9 per dollar as investors sold Turkish bonds and swaps.
Instead, Kavcıoğlu focused on the policies of global central banks since the financial crisis of 2008 and the challenges monetary decision makers face from accelerating inflation.
Turkey’s central bank has cut borrowing costs for the first time since May last year amid political pressure from President Recep Tayyip Erdoğan’s government. Ratings agency Fitch said on Monday that domestic politics may “dictate further monetary easing to support growth in spite of macroeconomic instability risks and Turkey’s external vulnerabilities”.
Erdoğan claims high interest rates are inflationary, a view that contradicts with conventional economic thinking. He has sacked three central bank governors in just over two years and replaced most members of the central bank’s monetary policy committee since appointing Kavcıoğlu in March.
The effects of the COVID-19 pandemic and economic stimulus by the government, including the provision of cheap loans by state-run banks, has helped drive Turkey’s inflation rate to almost 20 percent. In August, inflation accelerated to 19.25 percent from 18.95 percent in July, the highest level in major emerging markets outside of crisis-hit Argentina.
Kavcıoğlu said he expected reduced pressure on Turkey’s inflation as energy and pandemic-driven high rates of price increases across the globe dissipate with the normalisation of demand, waning base effects and the easing of supply constraints.
“These factors will also have a downward effect on Turkey’s inflation in the upcoming period,” he said at the Future of Finance Summit in Istanbul. “We assess that such pricing behaviour will converge back to its pre-pandemic state in the upcoming period as the economic and social normalisation gains pace.”
Kavcıoğlu said surging food prices in Turkey – the cost of food and beverages jumped by an annual 29 percent in August – were part of a global trend which is yet to normalise.
“Many food products surged in price during the exit from the pandemic. The persisting drought also has an adverse impact on production conditions and prices in this area,” he said.
Kavcıoğlu said Turkey was among the countries where rising food prices most adversely affect inflation due to their weight in the inflation basket, citing a cross country comparison.
“To ensure that the normalisation process continues properly, the Central Bank of the Republic of Turkey will take the necessary policy steps, as it has done so far,” he said.
Kavcıoğlu only mentioned the Turkish lira on one occasion during his speech during an explanation of the central bank’s liquidity management policy.
The lira was trading up 0.2 percent at 8.85 per dollar on Wednesday.
On Monday, Kavcıoğlu said there were no domestic policy grounds for the lira’s rapid decline in value against the dollar, the T24 news website reported.
More than half of the lira’s losses this month were due to monetary policy decisions by the U.S. Federal Reserve and statements by Fed chief Jerome Powell, Kavcıoğlu said in an interview, according to T24.