Cbank Signals More Rate Cuts Under Erdoğan Pressure

Turkey's central bank may hold an early monetary policy meeting next week and discuss an interest rate cut if inflation continues to fall sharply, Governor Erdem Başçı said on Tuesday, comments that follow increased pressure from President Recep Tayyip Erdoğan on the bank to lower the rates.

Başçı, under pressure from Erdoğan and also the government to lower rates ahead of a June parliamentary election, said the bank could act as early as Feb. 4 if data due a day earlier show January inflation slowing by more than 1 percentage point. The bank cut the repo rate 50 points to 7.75 percent last week. Observers have said the central bank is again risking its credibility by yielding to political pressure for rate cuts while this is bad news for lira, which only last month hit record lows against the US dollar at 2.4140. The lira weakened to 2.36 against the dollar on his comments, reversing earlier gains after he announced a cut in the bank's forecast for inflation this year to 5.5 percent from a previous 6.1 percent. "We could hold a meeting to take a rapid decision," Başçı told a news conference called to announce the bank's quarterly inflation report. "If January inflation falls more than one (percentage) point and core (inflation) is good, we could even make an assessment on Feb. 4," he added. The next monetary policy committee meeting is scheduled for Feb. 24.

Başçı is working on the optimistic idea that January inflation could fall more than 1 percentage point from 8.17 percent year-on-year in December. The weaker lira since December, fading effects of lower oil and strong core price pressures mean that hope is likely to be disappointed. Lira losses after Başçı's comments suggests a lack of conviction about lower inflation and a significantly narrower current account deficit. Turkey's high external debt and the prospect of higher Fed rates later this year are also big negatives for lira. UBS strategist Manik Narain said Başçı's comments were "very dovish" and called talk of an emergency meeting "premature" with inflation still above the bank's 5 percent target. "It does create some medium-term risks," he said. The central bank cut its main one-week repo rate last week by 50 basis points but drew a rebuke from government ministers who said it was not enough to support growth.

Erdoğan pressure

Erdoğan, a vociferous advocate of lower rates, kept up the pressure, on Tuesday reiterating his assertion that high interest rates cause high inflation.

Erdoğan reiterated on Tuesday that Turkey must lower interest rates if it is to attract more investment, just hours after the central bank signaled it could hold an early monetary policy meeting next week. In comments broadcast live on television, Erdoğan said inflation, which stood at 8.17 percent in December, would decline when Turkey reduces its interest rates.

"Look at the world's developed countries. There's no rates policy like ours. In Japan interest rates are negative and inflation very low. If we want investment we must achieve this," he said. Başçı said inflation could drop to its lowest in 45 years this year and said the decline was expected to accelerate from this month, approaching the 5 percent target by mid-year. He said the midpoint of the bank's 2016 year-end inflation forecast was 5 percent. The lira initially firmed to below 2.34 against the dollar following Başçı's comments on inflation, from 2.3520 beforehand. But it eased back to 2.3600 by 1203 GMT after he raised the possibility of an early policy meeting. Consumer prices fell 0.44 percent month-on-month in December for an annual rise of 8.17 percent and are expected to end this year at 6.82 percent, according to the latest central bank survey of business leaders and economists.

(Cihan/Today's Zaman)