The new governor of Turkey’s central bank, Naci Agbal, said he does not expect it to begin considering cutting interest rates from 17% until much later this year given upward pressure on already high inflation.

Rate hikes are also still a possibility, he told Reuters.

In his first interview since taking the reins three months ago, Agbal said the central bank intends to move ahead of the market, including swiftly hiking rates if there is any sign that inflation, now 15%, might drift higher than expected.

His comments, including the revelation that Turkey is no longer seeking currency swap lines with foreign counterparts, reinforced a growing view among investors that the bank is in no rush to start easing policy despite calls for lower rates from Turkish President Tayyip Erdogan.

“It does not seem possible to put interest rate cuts on the agenda for a long time this year,” Agbal said, saying that consumer prices are set to edge higher for a few months before slowly declining to the bank’s forecast of 9.4% by year-end.

“If any new data that we come across indicates a risk of deviating from the medium-term target path in inflation expectations and pricing behaviour, we will tighten further in advance,” he said at the bank’s new headquarters in Istanbul.

The Turkish lira rallied nearly 1% in response on Friday to its strongest level since early August, while dollar bonds rose and volatility dipped in a signal of market confidence.

Erdogan appointed Agbal as part of a shock leadership overhaul a day after the lira touched a record low in early November. The Turkish president also pledged a new market-friendly economic era.

The central bank has since hiked rates to 17% from 10.25% to battle inflation that has been stuck in double-digits for most of the last three years, giving Turkey the tightest monetary policy of any major developed or emerging market economy.

After years of avoiding Turkish assets, investors have begun edging back in, with some $15 billion in foreign inflows since November driving the lira up 15% and dramatically cutting gauges of market risk.

ERDOGAN’S SHADOW

Yet concerns remain over whether Agbal can repair the bank’s tattered credibility and rebuild its FX reserves, seen as a country’s buffer against financial crises, which on a net basis fell last month to a quarter of their levels at the start of 2020 due to costly state interventions in currency markets.

Erdogan, who fired the last two central bank chiefs over policy disagreements, has repeated in recent weeks his long-held, unorthodox view that tight high interest rates cause inflation.

Some analysts doubt Agbal will be able to keep his hawkish pledge. They generally expect the bank to start cutting borrowing costs from mid-year and say its inflation forecasts are too optimistic.

Agbal, a former finance minister who is close to Erdogan, said past cycles — including in 2019, when rates came down from 24% after a currency crisis — lay bare the economic costs of easing policy too early.

This time, he said, a “strong disinflationary bias” will guide the bank’s approach. It will manage expectations by “moving ahead of the markets”, he added.

“As the market confirms this determination of ours, inflation expectations” will dip, Agbal told Reuters. “We expect capital inflows ... to continue” especially with longer-term portfolio investments, he added.

Agbal said the bank would patiently rebuild its depleted FX reserves using auctions and has called off a hunt for foreign swap lines that saw it reach out to Washington, London, Tokyo and other capitals last year.

“Our strategy to raise reserves does not include swap agreements with other countries’ central banks,” he said. Phoenix Kalen at Societe Generale said abandoning the swaps plan was encouraging.

“The recovery narrative in Turkish assets has been strengthened” by Agbal’s policy comments, she said.

STANDING ALONE

Most countries have slashed borrowing costs to soften the blow of the coronavirus pandemic.

But in Turkey, the central bank has hiked by 675 basis points in three months and said it will do more if needed. It predicts it will take until the end of 2023 for inflation to hit a 5% official target for the first time since 2011.

The sharply higher interest rates have pinched businesses and households at the same time that food inflation has soared more than 20%.

Sceptical Turks hold a record $236 billion in hard currencies to hedge against inflation and the lira — which has shed more than half its value since the 2018 crisis, including 20% last year alone, raising import costs.

“Rebuilding policy credibility will take time (since) Turkey has a long record of overshooting inflation targets and of credit-fuelled macroeconomic volatility,” Fitch Ratings said this week.

A rollercoaster of recession, recovery and pandemic has seen the $760 billion economy average about 1% growth since 2018, down from the 5% levels that had defined Erdogan’s nearly two decades in power. Polls show his popularity dipping due to rising living costs and lost incomes.

Agbal said the economy has lost some pace recently but signs that Turks are shifting toward lira assets suggests a reversal in dollarisation may come. “We are working day and night ... to achieve lasting price stability,” he said. “We know we are in a difficult period.”—Reuters