Turkey's central bank head claims 'no reason' for lira to continue losing value

Central bank governor Şahap Kavcıoğlu has said that there is “no reason” for the lira to continue losing value against the dollar and that there is over $120 billion in gross reserves. Further, he said that monetary policy alone is not to blame for inflation and the rise in the price of consumer goods.

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Turkey's central bank governor Şahap Kavcıoğlu has said that there's "no reason" for the lira to continue losing value against the dollar, prompting surprise since the currency, down nearly 16% this year, is among the worst performers in emerging markets. 

In an interview with news portal T24 on Sept. 28, Kavcıoğlu said that the lira’s plummeting value and sky-high inflation rates cannot be blamed on monetary policy alone and that all sectors need to take collective responsibility for the rise in prices. According to Kavcıoğlu, there are over $120 billion in Turkey’s gross reserves. 

Last week, the central bank cut interest rates by 100 basis points, from 19% to 18%. The move sent the value of the lira tumbling to an all-time low. An unexpected rate cut in a surging inflation environment knocked the country's assets last week.

Kavcıoğlu said that the central bank was not solely to blame. A rise in food prices, he claimed, cannot be countered by central bank policy - instead, he said, “all sectors should take responsibility” for rising prices. 

Central bank governor Şahap Kavcıoğlu.

Kavcıoğlu further argued that the plummeting value of the lira against the dollar after the bank’s lowering of interest rates was baseless and the result of U.S. monetary policy, not Turkish. More than half of the blame for the plummeting value of the lira, he said, lies with U.S. Federal Reserve statements and decisions made by Fed Chairman Jerome Powell. He acknowledged that there was some capital outflow from Turkey after the decision to lower interest rates, but that this could not be more than $2 billion. He cited Turkey’s allegedly strong central reserves and a decrease in Turkey’s national deficit as reasons why the value of the Turkish lira against the dollar should not be so low. 

Turkey’s central bank has been the subject of heightened interest and controversy this year. The opposition, spearheaded by the main opposition Republican People's Party (CHP), has been asking the government about what happened to the $128 billion that went missing from the Central Bank's FX reserves.

Kavcıoğlu on Sept. 28 claimed that since he took office in March, Turkish lira deposits have increased by 225 billion. He cited this as an indicator of increased confidence in monetary policy.

Further, he said that the gross reserves still stand at over $120 billion and that he intends to increase this over his tenure. He estimated that by the end of the year, the reserve will stand at over $135 billion.

Kavcıoğlu went on to depict Turkey as a victim of international market dynamics. While he said he does not expect the Fed’s coming tightening of monetary policy - it’s expected that the Fed will enact rate hikes soon - will affect Turkey, he cited Turkey’s risk premium as unfair. Turkey’s risk premium, indicating investment risk in the country, has risen to 400. According to Kavcıoğlu, this is inaccurate - countries where the wealthy need to “live behind walls,” he said, have risk ratings near 170.

Finally, he addressed whether President Recep Tayyip Erdoğan played a role in the lowering of interest rates. The president has long been an advocate of lowering interest rates - in March, he fired central bank governor Naci Ağbal for having a hawkish stance on the issue. Kavcıoğlu denied that Erdoğan had any role in the rate drop, insisting instead that it was a policy intended to support the economy. He said many private contractors and businesses were struggling with high-interest rates.