Turkey’s new Central Bank chief faces first test on interest rates

The Central Bank kept its main rate on hold for the 13th consecutive month in March but cut its overnight lending rate by 25 percentage points to 10.5 percent. The repo rate was held at 7.5 percent and the borrowing rate was also left at 7.25 percent.

The previous administration’s reluctance to cut interest rates had frustrated some in the government, who argue that Turkey needs lower borrowing costs to fuel economic growth and investments. But investors have been unnerved about political influence over monetary policy amid high inflation pressure. With inflation at around 7.5 percent according to the latest data, the Central Bank has consistently missed its inflation target of 5 percent over the last five years.

The Bank’s monetary policy, mainly its interest rate policy, has been criticized by figures close to President Recep Tayyip Erdoğan. Although some leading economy ministers have occasionally underlined the importance of the Central Bank’s independence, Erdoğan’s allies have continued to harshly criticize the Bank’s rate policies.  

Çetinkaya, who was officially appointed as the Central Bank’s new governor through an announcement in the Official Gazette on April 18 and who is scheduled to formally take office in a ceremony late on April 19, will chair the first interest rate meeting on April 20 and will probably make his first public appearance as governor on April 26 to announce the Bank’s quarterly inflation report.


50-basis point cut expected on average

A majority of market players expect a rate cut of between 25 percent and 75 percent, mainly by 50 points in the upper band of the interest rate corridor. They warn that any higher cut would trigger even deeper concerns about the independence of the Central Bank. 

İş Portfolio Chief Economist Nilüfer Zengin said they expect a 50-point cut in the upper band. 

“When the short-term downward risks regarding the inflation rate are considered, the Central Bank could be expected to make a bigger cut. If the newly-appointed central banker accelerates the rate cut immediately in the first rate meeting, just one month after a 25-point cut by the Bank, it will mean some cloudy messages are being given. So we don’t believe the Bank will choose this way,” Zengin said, as quoted by Reuters last week. 

A steeper-than-expected cut to the upper band would make the Turkish currency less attractive for traders who borrow in low-yielding currencies, according to most analysts.