Turkey Central Bank Paves Way for Rate Cut With Guidance Shift

The Turkish central bank shifted its policy focus to a core set of prices amid accelerating inflation, paving the way for a cut in interest rates demanded by President Recep Tayyip Erdogan. The lira fell against the dollar.

The change came after Governor Sahap Kavcioglu’s earlier guidance to keep the benchmark interest rate above inflation faltered. A surprise jump in Turkish inflation in August pushed the nation’s benchmark interest rate adjusted for price growth below zero for the first time since October.

“The extraordinary conditions, especially due to the pandemic, increase the importance of core inflation indicators,” said Kavcioglu in a speech in Ankara on Wednesday.

“Globally, when monetary policy stance is determined, core indicators excluding transitory factors emanating from areas outside monetary policy’s influence are taken as the basis,” he said. “Central banks and policy makers follow food price changes, core inflation developments and impact of accelerating inflation on inflation expectations.”

Headline inflation accelerated for a third month to an annual 19.25% in August, up from 18.95% in July. The core inflation index showed prices, excluding volatile items such as food and energy, dropped to an annual 16.76% from 17.22% the previous month.

Kavcioglu has pledged to keep the benchmark above realized and expected inflation but has faced calls from Erdogan to deliver a rate cut as early as this month.

The lira dropped as much as 1.6% and was trading 1.3% lower at 8.4631 per dollar at 12:27 p.m. in Istanbul.

Kavcioglu, who kept interest rates unchanged at 19% for a fifth meeting last month, is the fourth governor of the central bank since 2019, with the president firing his three immediate predecessors.