Turkey's new central bank head promises tight policy, sources say

The former central bank governor, Naci Agbal, had raised the policy rate to 19% from 10.25% in four months


ISTANBUL- Turkey's new central bank governor, Sahap Kavcioglu, said on Thursday in his first call with investors that tight monetary policy would remain in place because of high inflation, according to several people on the call, helping boost the lira.

President Tayyip Erdogan installed Kavcioglu on March 20 in a move that sent the lira down 13% as investors predicted a quick pivot to loose policy, given Kavcioglu's past criticism of the bank's tight stance. 

Asked about a February newspaper column in which he said high rates boosted inflation, Kavcioglu downplayed his previous views and said as governor he would act in line with his "institutional task".

Two sources told Reuters that a senior bank official said on the call there would be no premature interest rate cuts, and that inflation - at 15.6% in February - was now close to the upper bound of its forecasts.

The official added that the recent lira selloff would push inflation higher in the short term, the sources said.

"They are saying all the right things" and will probably "hold tight" for now, one investor said.

The lira was some 1.57% stronger at 8.1350 against the dollar at 1304 GMT.

The former central bank governor, Naci Agbal, had raised the policy rate to 19% from 10.25% in four months on the job, to address inflation that has remained in double digits for most of the past four years.

The bank expected a maximum of 17% inflation in March and a bit more in April, according to its February forecast. Analysts predict it will rise through April, when Goldman Sachs expects it to peak at 18%. 

Omer Emec, chief economist at Albaraka Turk, who attended the meeting, said the messages on the call helped reassure markets, but investors would want to see action.

One of the people who spoke to Reuters said that while investors were convinced there would be no rate cut this month, the bank would struggle to shed the market perception that policy would be eased soon.

Asked on the call whether rates would be raised further if needed, Kavcioglu did not clearly answer "yes". He said the bank will monitor data before the next policy meeting and do what needs to be done, said two of the sources.

The local investor call coincided with the release of data showing hard-currency holdings among Turks fell sharply after Agbal's ouster, to $223.67 billion as of March 26, from $232.50 billion a week earlier. 

March inflation data will be released on April 5.

(Reporting and writing by Jonathan Spicer; additional reporting by Daren Butler; editing by Larry King) ((jonathan.spicer@reuters.com; Reuters Messaging: jonathan.spicer.thomsonreuters.com@reuters.net @jonathanspicer))

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