Turkey's central bank chief sees ‘long time’ before rate cuts

Turkish central bank governor Naci Ağbal said monetary policymakers probably will not cut interest rates until much later this year as they work to contain inflation.

The central bank will get ahead of the market and hike rates swiftly should annual consumer price inflation of 15 percent drift higher than expected, he said in an interview with Reuters published on Friday.

“It does not seem possible to put interest rate cuts on the agenda for a long time this year,” Ağbal said. Consumer price inflation is set to edge higher over the coming months before slowly falling to the bank’s year-end forecast of 9.4 percent, he said.

Turkey’ central bank has more than doubled its benchmark interest rate to 17 percent since September to help contain double-digit inflation and to defend the lira. Ağbal arrived in early November when President Recep Tayyip Erdoğan sacked his predecessor as the lira fell to a record low.

But Erdoğan, who has sacked two central bank governors in less than two years, said this week that Turkey will not be able to achieve its inflation goals without cutting interest rates. His unorthodox views on interest rates have raised concern among investors that the central bank’s battle against inflation might be compromised by political interference.

“If any new data that we come across indicates a risk of deviating from the medium-term target path in inflation expectations and pricing behaviour, we will tighten further in advance,” Ağbal told Reuters at the central bank’s new headquarters in Istanbul. It was the first interview since his appointment.

Higher interest rates have helped the lira to strengthen to around 7.1 per dollar from the all-time low of 8.58 per dollar reached on Nov. 6. It lost about a quarter of its value last year. It was trading up 0.5 percent at 7.09 per dollar at 10:52 a.m. local time in Istanbul on Friday.

Turkey’s central bank is no longer seeking currency swap lines with foreign counterparts as part of its foreign exchange reserve-building strategy, Ağbal said. The bank had previously reached out to Qatar, Japan, Great Britain and the United States to provide funds to shore up its depleted reserves.

A “strong disinflationary bias” will guide the bank’s approach to monetary policy, Ağbal said. It will manage expectations by “moving ahead of the markets”, he said.

“As the market confirms this determination of ours, inflation expectations” will dip, Ağbal said. “We expect capital inflows ... to continue” especially with longer-term portfolio investments, he said.

Ağbal said the bank would rebuild its foreign currency reserves through auctions.

There were also signs that Turks were shifting toward lira assets, signalling that a reversal in recent dollarisation may come, he said.

“We are working day and night ... to achieve lasting price stability,” Ağbal said. “We know we are in a difficult period.”