Turkish central bank chief says rate cut was not a surprise for lira

ANKARA (Reuters) -The head of Turkey’s central bank said on Monday that a 100 basis-point interest-rate cut last month was not a surprise and had little to do with the sell-off that resulted in the lira, which declined to a new record low beyond 9 against the dollar.

Responding to questions from a parliamentary commission, Governor Sahap Kavcioglu said the central bank had not neglected its duties in cutting the policy rate to 18% from 19%.

“I can say very clearly that we did not carry out a surprise cut,” he said after a presentation to the planning and budget commission.

Kavcioglu added that inflation – which is near 20% after a year-long rise – is following a volatile course and that the bank will take into account risks while determining its policy.

In a Reuters poll last month, only two of 20 economists predicted a rate cut. In response to the cut, the lira tumbled to a series of record lows against the dollar, which itself has firmed in recent weeks, adding to the sell-off.

The lira was down more than 0.6% by 1706 GMT on Monday to hit a record low of 9.02 against the dollar, bringing its losses so far this year to 17.5%.

Analysts viewed the policy easing as fresh evidence of political interference by President Tayyip Erdogan, an opponent of high interest rates who had long called for monetary stimulus despite soaring prices.

Citing sources, Reuters reported on Friday that Erdogan was irked the policy easing took so long and he is losing confidence in Kavcioglu, less than seven months after he sacked his predecessor.

Tatha Ghose, an analyst at Commerzbank, said rates will come down under any bank governor appointed by Erdogan.

“The FX market has every reason to price in lower interest rates in coming quarters, which is exactly what it has been doing, thereby resulting in noticeable underperformance of the lira exchange rate,” he wrote in a client note.

At the hearing, Kavcioglu said that central bank reserves have stabilized after a decline in recent years and were on an upward trend. Data shows net foreign reserves have risen since April.

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