Markets shouldn’t take for granted that the Monetary Policy Committee will cut interest rates as soon as April, Governor Sahap Kavcioglu says in written response to questions from Bloomberg.
Kavcioglu’s comments remind the rhetoric of former central bank governors which were all politically correct. The words are chosen carefully not to disturb the sentiment, yet as time progress the actions mainly of premature and excessive rate cuts do not stand in harmony with the declared targets to lower inflation.
The Governor added that as the Monetary Policy Council they would continue to make decisions with an understanding of a corporate monetary policy to ensure the permanence of the decline in inflation. as he stressed that they would observe the effects of the policy steps taken so far in this framework.. Meaning the rate hikes and the policy simplification.
Kavcioglu stressed that the Central Bank was firmly committed to the 5 percent inflation target.
His appointment and the abrupt sacking of the former Governor Agbal, Kavcioglu’s all previous comments on how interest rates should be lower to combat high inflation leaves the markets sure about Kavcioglu’s intentions. With President Erdogan frequently meddling in with the monetary policy decisions, the new Governor has little room to tighten monetary policy as the inflation remains on a rising path.
Given the volatility and the depreciation of the Turkish lira following the change in central bank governor, Kavcioglu might not have room to ease the monetary policy in the upcoming decision day on April 15th. The March inflation to be announced on April 3rd would also show the annual CPI inflation edging higher towards 17 percent levels when the current policy rate is at 19 percent.
Nonetheless, he would be inclined to cut the policy rate starting from May and on as the food price inflation is likely to get tamer given the start of new season agriculture production.
The expected policy easing in the pipeline would both determine the value of the Turkish lira and the level of continuing dollarization in the Turkish economy.
Below is Governor Kavcioglu’s interview with Bloomberg:
Central Bank Independence
Q: Removing three central bank governors in the past two years has prompted market players to think the CBRT has lost its independence. How are you going to convince markets that the central bank still has instrument independence?
A: The Central Bank’s monetary policy is shaped by common understanding by the Monetary Policy Committee, which is chaired by me, and composed of a total of seven members. The Central Bank is vested with instrument independence by the Law to use the monetary policy tools to reduce inflation permanently. The CBRT will continue to use the monetary policy instruments independently considering the needs of the day in line with changing global conditions, and in light of domestic
macroeconomic developments, primarily the inflation outlook.
Previous Decision
Q: What do you think about the latest surprise decision to increase interest rates by 200 basis points? Do you think the tightening was excessive?
A: Changing conditions all over the world prompt central banks to take tough decisions. The Monetary Policy Committee always makes its decisions evaluating the data set specific to the conditions of the time. In principle and ethically, I do not find it appropriate to comment on previous decisions. In the
Monetary Policy Committee Meeting in April, we will make our decisions as the Committee by evaluating inflation developments and all available data, as has been and will be the case in each
and every other meeting.
Rate Cuts
Q: Considering the uptick in inflation, is a rate cut one of the possibilities in the meeting in April? Last month, the central bank said it does not seem possible to cut rates “for a long time this year.” Do you agree with this statement? When do you think is the right time to ease monetary policy?
A: I do not approve a prejudiced approach to MPC decisions in April or the following months that a rate cut will be delivered immediately. All in all, monetary policy decisions are made by the Monetary Policy Committee in view of the available information and data set regarding macroeconomic developments.
We strictly adhere to the medium-term inflation target of 5% set jointly with the Government, and I am aware of its importance for sustainable growth.
When determining the monetary policy stance, we will continue to take into account the realized and expected inflation as well as global capital flows, real yields in peer countries, and the portfolio preferences of residents.
In the new period, we will continue to make our decisions with a corporate monetary policy perspective to ensure a permanent fall in inflation. In this respect, we will also monitor the effects of the policy steps taken so far.
FX Reserves
Q: In reference to using central bank reserves through state banks to prop up the lira in 2019 and 2020, you have said in one of your articles: “When will the reserves be used if they won’t be used when needed?” Would you use central bank reserves to prop up the lira through state banks like in last year if needed? The CBRT has previously said that it may consider direct FX purchases. What policies will you implement to boost central bank reserves? Is the central bank still considering direct FX purchases?
A: Each period should be evaluated in light of its own specific terms and conditions. Turkey had to struggle first with the recent geopolitical developments and then with the challenges brought by the pandemic. In the period ahead, the Central Bank will adhere to the floating exchange rate regime as
stated in the Monetary and Exchange Rate Policy document, and exchange rates will be determined by supply and demand balance under free market conditions.
We maintain our goal of boosting FX reserves for monetary policy effectiveness and financial stability. In addition, the Central Bank may use reserve-boosting tools under appropriate conditions, with prior and proper communication thereof.
Policy Simplification
Q: In your meeting with bank executives, you have stated that you would maintain the operational framework of the current policy. Does this mean that you will stick to one-rate policy and therefore will not provide back-door tightening through late liquidity window or overnight lending rates?
A: Yes, we will maintain the operational framework of the monetary policy, and the one-week repo rate will remain our main monetary policy tool. We see that a simplified operational monetary policy framework strengthens the transmission mechanism and facilitates a simpler and clearer communication of the monetary policy decisions and practices.
Inflation Fight
This is only an excerpt
Bloomberg