Turkey's new central bank governor vows to keep a tight rein on interest rates

Monetary policy won't be eased until inflation is on a permanent downward path, Sahap Kavcioglu said

FILE PHOTO: Turkey's new Central Bank Governor Sahap Kavcioglu sits at his office in Ankara, Turkey March 21, 2021. Turkish Central Bank/Handout via REUTERS ATTENTION EDITORS - THIS PICTURE WAS PROVIDED BY A THIRD PARTY. NO RESALES. NO ARCHIVE./File Photo

Turkey's new Central Bank Governor Sahap Kavcioglu said current elevated levels of inflation require tight monetary policy, pledging to keep the bank's key interest rate above inflation until it was clearly on a permanent downward path.

His comments helped trim steep losses in Turkey's lira, which fell as much as 2.7 per cent against the US dollar on Tuesday after the overnight dismissal of one of his deputies.

Mr Kavcioglu was appointed to the post just over a week ago, when President Recep Tayyip Erdogan sacked former Governor Naci Agbal two days after he hiked the policy rate to 19 per cent to head off inflation, which stood at 15.6 per cent in February.

The overhaul at the central bank led to market turmoil on concerns that Mr Kavcioglu, who prior to his appointment supported Erdogan's view that high rates lead to high inflation, would cut rates prematurely, possibly below the inflation level.

But Mr Kavcioglu said that would not be appropriate, at least for now.

"The high levels of inflation and inflation expectations in the period we are in require a tight monetary policy stance," he said at the bank's annual general assembly meeting.

"Until indicators pointing to a permanent fall in inflation are realised, we will maintain the policy rate at a level above inflation, in a way that maintains the disinflationary effect," he added.

His comments helped the lira trim losses on Tuesday. The currency stood at 8.28 per US dollar at 4.54pm in the UAE, down 0.67 per cent on the day but a recovery from an earlier low of 8.4510.

Analysts have suggested Turkey could return to unorthodox policies, similar those used before Mr Agbal's appointment last November.

Those concerns were stoked further last week when the lira's overnight swap rate in London surged to 1,400 per cent for a day, before gradually declining.

Before Mr Agbal's appointment in November, the bank had also used so-called "back-door tightening" instead of raising the policy rate, and sold reserves to protect the lira.

Mr Kavcioglu said the one-week policy rate will be the main policy tool, and that policy tools will be used "in an appropriate way". He added that inflation is seen falling to the targeted 5 per cent in 2023.