Coronavirus: Fed’s Kaplan Says Monetary Policy Not Equipped To Address Structural Problems — As It Happened

Turkish prices rose slower than expected in May, giving the central bank some leeway to comply with President Recep Tayyip Erdogan’s demands to ease monetary policy.

The lira currency’s record weakness however may compel policymakers to leave interest rates high at a rate-setting meeting this month.

Consumer inflation was 16.59 per cent year-on-year, the state statistics office said on Thursday, slower than a forecast of 17.25 per cent in a Reuters poll and easing from a peak in April of 17.14 per cent. A two-week national lockdown to curb the spread of coronavirus last month helped suppress consumer demand, analysts said.

Inflation has been running at a double-digit pace for much of the past three years, forcing the central bank to keep its benchmark interest rate at 19 per cent since March.

Erdogan, a self-declared “enemy of interest rates”, renewed his call this week for borrowing rates to fall, sending the lira to record lows as investors worry about his influence over the bank.

The currency traded at 8.6198 to the dollar on Thursday after the data was announced. The lira has lost 16 per cent of its value since March when Erdogan replaced the hawkish central bank governor with a newspaper columnist who shares his unconventional view that high interest feeds inflation. The bank’s next rate-setting meeting is June 17.

Governor Sahap Kavcioglu told investors on Wednesday that expectations he will cut rates prematurely “are not based on just reasoning”, the bank’s website said.

Erdogan said in televised comments on Tuesday that he had spoken with Kavcioglu and that it was “imperative to lower rates” in July or August.

High unemployment and inflation during the coronavirus pandemic have eroded support for Erdogan’s ruling party to its lowest level in its 18 years in power, and the president wants to pump credit into the economy to boost growth.

Official data this week showed Turkey’s $717bn economy grew 7 per cent in the first quarter, one of the fastest rates among major economies. But the expansion has failed to create enough jobs to reduce unemployment that economists estimate is more than twice the official rate of 13 per cent, when the labour participation rate is examined.

Inflation will probably remain above 16 per cent through the second half of 2021, especially if central bank policy continues to weigh on the lira, said Timothy Ash, a strategist at BlueBay Asset Management.

“This will present a dilemma then for the central bank as its political masters clearly want a rate cut and early,” he wrote in a research note. “But that could easily unanchor the lira again, and we could see another bout of exchange rate pass through to inflation.”

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Coronavirus: Fed’s Kaplan says monetary policy not equipped to address structural problems — as it happened

Source:The Financial Times

Coronavirus: Fed’s Kaplan says monetary policy not equipped to address structural problems — as it happened