Kavcıoğlu reaffirms commitment to tight policy

ANKARA

Turkey’s Central Bank chief on June 2 tried to quash speculation that the bank’s Monetary Policy Committee (MPC) will cut interest rates earlier than investors expect.

The new governor told investors in remarks carried by Turkish media that market expectations of an impending rate cut were groundless.

“Expectations of an early policy easing, which are not based on just reasoning, need to disappear,” Şahap Kavcıoğlu was quoted as saying.

"The significant decrease in the forecast path of the April Inflation Report is expected to be at the end of the third quarter and the beginning of the fourth quarter," he said, underlining that “this outlook should be interpreted together with our determination to keep the policy rate above inflation throughout the disinflation process."

He also pointed out that the components of growth in the first quarter are in line with the outlook in the April Inflation Report, adding economic activity continues to be strong and above the trend.

"We expect a strong upward trend in exports, a significant decline in gold imports and a slowdown in retail loans to support an improvement in the external balance," Kavcıoğlu said.

He also said the Monetary and Exchange Rate Policy Text is a roadmap for the policies and communication strategy the bank will implement in 2021.

"As in the first two quarters of the year, we will strictly adhere to this roadmap from now on," he concluded.

Since October 2020, the MPC has raised the main rate from 10.25 percent to 19 percent to fight stubbornly high inflation, which is currently over 17 percent. The bank held the rate steady at its first policy meeting under Kavcıoğlu last month.

Most central banks around the world believe that higher rates make local currencies more attractive for investment and shore up their value against the dollar. They also fight inflation by slowing down spending and reducing consumer demand.

Erdoğan said in the televised interview that he expected to see lower rates some time around July or August.
Kavcıoğlu left the room open to a slight reduction by repeating his pledge to keep the policy rate above the annual rate of inflation.

The Turkish economy expanded by 7 percent between January and March - one of the best performances in the emerging markets world.