Turkish central bank Governor Erdem Basci clarified today what he meant by “measured” steps on interest rates, saying that phrase has been used in the past to refer to moves of 25 to 75 basis points.
“This is what the market understands when you say ‘measured,’” Basci told businesspeople in the central Anatolian province of Konya, for the first time spelling out what he meant in April. “We never strayed outside this range whenever we said measured steps.”
The governor’s policy has put him on a collision course with Prime Minister Recep Tayyip Erdogan, who has been pushing for deeper reductions to stimulate growth. Erdogan called the half a percentage point cut the central bank announced last month “a joke,” given the bank’s doubling of the rate to 10 percent in January in an effort to stem a decline in the lira.
Basci’s comments were his first public response to Erdogan’s criticism. While avoiding an explicit commitment to any given rate, his guidance set the tone before next week’s rates decision.
The Turkish lira, which traded 1 percent lower at 2.1416 per dollar at 3:21 p.m. in Istanbul, trimmed some of its earlier declines during Basci’s speech. Still, the currency lost more than 2.5 percent against the dollar over the last week, as fighting in neighboring Iraq rages, to become the worst performing emerging-market currency tracked by Bloomberg.
That depreciation may be changing the plans of policy makers as they prepare for a June 24 rates meeting, according to Ibrahim Aksoy, chief economist at Gedik Invest in Istanbul. Lira weakness since last year is among the top reasons Basci cites for failure to meet his inflation targets.
“Further stress on the lira may prevent rate cuts in the depreciation period for emerging-market currencies and given the risks the lira bears due to the turbulence in Iraq,” Aksoy said in e-mailed comments after Basci’s speech. If the bank cuts, the reduction is likely to be of 25 to 50 basis points, Aksoy said.
Further interest rate cuts can be considered as long as inflation expectations improve, Basci said. Consumer prices rose an annual 9.7 percent last month, nearly double the 5 percent target set jointly by the government and the central bank. The inflation rate will start falling from this month and be near that target by the end of 2015, four months before Basci’s term expires, the governor said.
“I won’t find peace before I see 5 percent that year end,” Basci said.
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