Turkey's Central Bank hints at further rate cut 'if inflation outlook improves'

KONYA - Reuters

'If everyone is convinced that inflation is falling, if we are convinced that the inflation outlook has improved, we will evaluate it,' Erdem Başçı said June 16. AA Photo

Turkey’s Central Bank could review interest rates as soon as this month if it is convinced that the outlook for inflation is improving significantly, Governor Erdem Başçı has said.

He said that economic growth was on track and that Turkey’s current account deficit - its main economic weakness - would narrow “swiftly” this year as the economy keeps rebalancing.

“A cautious, measured, gradual rate cut process is being priced in. We are observing it in long-term rates, as long as the confidence in the Central Bank reducing inflation continues, as long as it’s being observed in long-term rates, we will do it,” Başçı told business leaders in the central city of Konya June 16.

“But we will do it with caution, without upsetting the balances, without destabilizing,” he added.
Başçı also asserted the bank’s independence, saying it was not subject to political interference or any sort of “tutelage” and would use interest rates as it saw fit.

Asked how soon an interest rate cut could come, Başçı said it could be on the agenda at the monetary policy committee meeting on June 24.

“If everyone is convinced that inflation is falling, if we are convinced that the inflation outlook has improved, we will evaluate it ... but we don’t have to do it. We will make a decision that takes into account all risks, all factors, all possible shocks, risk premiums,” he said.

Prime Minister Recep Tayyip Erdoğan, determined to maintain growth ahead of presidential elections in August and parliamentary polls next year, has been a frequent critic of Central Bank policy and has repeatedly called for lower interest rates.

Rates 'a policy tool'

Başçı defended the bank’s use of interest rates as one of its main policy tools. “We are human, and we are also citizens of this country. We also don’t want high interest rates, but this is a policy tool for us,” Başçı said.

“It is one of the tools, and if one tool was missing, you could not do what’s necessary. We have showed to everyone that we can use this tool when needed.”

Başçı said the economy was growing at around 4 percent, in line with the government’s targets, and that inflation would start falling from June. He said the current account deficit would narrow towards 5 percent of economic output this year as growth becomes more balanced, with net exports set to have had a positive impact in the second quarter.

But he warned that Turkey’s high loan-to-deposit ratio of around 135 percent could trigger forex and interest rate volatility if it continues at this level.

Başçı also touched on the independency debate surrounding his institution, saying “the Central Bank is a representative of the government, but not a tutelgae institution.”

“The Central Bank is an agency and is outside of politics,” he said.

He said the Central Bank was monitoring events in Iraq, Turkey’s second-biggest export market, where an offensive by Sunni insurgents threatens to dismember Iraq and leave Turkey with a widening Islamist insurgency along its southern borders.