By Ali Kucukgocmen and Jonathan Spicer
ISTANBUL (Reuters) -Turkey’s central bank held rates steady at 19% as expected on Thursday and dropped a pledge to tighten policy further if needed, in its first decision since President Tayyip Erdogan fired the hawkish former governor and set off a market selloff.
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, which has risen above 16%.
The lira slipped 0.7% to as far as 8.125 versus the dollar after the bank under new governor Sahap Kavcioglu replaced the hawkish guidance with a softer assessment of risks to inflation and the economy.
Erdogan’s shock removal of his predecessor, Naci Agbal, a respected policy hawk, last month sent foreign investors fleeing on concerns he would quickly slash rates.
But Kavcioglu – who had previously criticised the tight stance – in recent weeks promised no abrupt changes. Those assurances as well as the more than 10% lira selloff convinced analysts that policy would remain steady for now.
In a Reuters poll, all but two of 19 economists forecast the bank would keep its one-week policy rate unchanged this week, before easing likely around mid-year.
UNORTHODOX MONETARY VIEW
John Hardy, FX strategy head at Saxo Bank, said the currency had weakened on Thursday because Agbal’s pledges were scrapped.
“Any daylight they see, they are going to want to cut rates. Holding them here (today) is just an acknowledgment they can’t get away with it for now,” Hardy said.
In its statement, the bank’s policy committee said rates “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”.
Last month, the central bank under Agbal had raised rates by a more-than-expected 200 basis points to levels last touched in mid-2019 to dampen inflation and support the currency.
Before taking the job, Kavcioglu had openly criticised the tighter stance and espoused Erdogan’s unorthodox view that high rates cause inflation.
Erdogan has repeatedly called for monetary stimulus and he has fired three bank chiefs in two years, eroding monetary credibility.
Analysts had warned that a rate cut this week would further hit the lira, which plunged 15% immediately after Agbal’s dismissal before clawing back some losses. Depreciation boosts inflation via imports, delaying any rate cut plans, they say.
In the Reuters poll, forecasts for the first cut were split roughly between the second and third quarters, and the policy rate was seen at 15% by year end.
(Additional reporting by Daren Butler, Ece Toksabay, Ezgi Erkoyun and Marc Jones; Editing by Gareth Jones)
