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New Turkish central bank governor signals rate cut

Turkey’s new central bank governor has signalled an impending interest rate cut, arguing that the bank has “room to manoeuvre” on monetary policy as inflation falls.

Murat Uysal was promoted to the head of the bank earlier this month after Recep Tayyip Erdogan, the Turkish president, sacked his predecessor over a dispute about the pace and depth of rate cuts.

Speaking publicly for the first time since his appointment on July 6, Mr Uysal used an interview with the state-run Anadolu news agency to emphasise the importance of tackling inflation and promised to safeguard a “reasonable rate of real return” for investors.

But, ahead of a meeting of the bank’s Monetary Policy Committee next week, he suggested that a recent improvement in inflation had created the space for a rate cut.

“All these developments suggest that there is room for manoeuvre on monetary policy,” he said.

Mr Uysal stressed the need to “maintain a cautious monetary policy” but said it was better to assess the degree of monetary tightness by looking at real interest rates rather than nominal rates. Foreign investors and domestic savers alike demand a significant premium over the rate of inflation as an incentive to hold the Turkish lira, or lira-denominated assets.

“I can affirm that, by closely watching all factors affecting the inflation outlook, we will develop a framework that is built upon both expectations and our own projections and maintains a reasonable rate of real return,” Mr Uysal said.

With the central bank’s benchmark rate set at 24 per cent, and inflation that fell to 15.7 per cent in June, Turkey offers a real interest rate of 8.3 per cent.

Before last week’s sacking of the previous governor Murat Cetinkaya, investors had grown comfortable with the idea of a small rate cut at the bank’s next monetary policy committee meeting on July 25 thanks to cooling inflation and a period of relative currency stability.

“Markets were certainly thinking that a cut was on the cards,” said Phoenix Kalen, emerging markets strategy director at Société Generale. “It was reasonable to expect cuts in the months ahead.”

But the firing of Mr Cetinkaya has led to investor anxiety that, under pressure from Mr Erdogan, the bank could be forced to cut rates more aggressively.

The Turkish president, who is a fierce opponent of high interest rates, has said since Mr Cetinkaya’s sacking that he wants the central bank to provide“stronger support” for the government’s economic policy. On Sunday Mr Erdogan said he hoped to bring down both inflation and interest “in a serious manner” by the end of the year.

Ms Kalen said that, in light of the changes at the top of the bank, it would be difficult for markets to “parse” future interest-rate cuts.

“The difficulty will be in trying to gauge how much of any cut comes from what’s justified by economic fundamentals and whether any portion of the cut will be coming from political pressure,” she said. “If we see the real policy rate cushion drop from 8.3 per cent to something below 5 per cent in one single meeting, that would cause a great deal of consternation among investors.”

In Monday’s interview, Mr Uysal, a former deputy governor of the central bank, said that he planned to improve its transparency and communication, as well as strengthening its foreign currency reserves.

The bank has come under fire from international investors for a lack of transparency over its reserves. It has faced accusations of selling dollars via state-owned banks in order to support the lira, and of using acontentious method of accounting for swap transactions to disguise a fall in reserves.

Mr Uysal said the bank was considering “revising our existing instruments in order to strengthen our reserves”, without giving further details.

Turkish financial markets were closed on Monday due to a national holiday to commemorate the anniversary of a 2016 coup attempt.

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