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Turkey’s central bank holds interest rate at 19 percent under new chief

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Turkey’s central bank on Thursday held its main interest rate at 19 percent in the first decision since President Recep Tayyip Erdoğan sacked its market-friendly governor and replaced him with a party loyalist, Agence France-Presse reported.

The bank said it had “decided to maintain the tight monetary policy stance by keeping the policy rate unchanged,” adding that it intended to keep it above the annual rate of inflation, which came in at 16.2 percent last month.

“The policy rate will continue to be determined at a level above inflation to maintain a strong disinflationary effect,” it said in a statement.

The lira held steady against the dollar minutes after the decision was announced, but economists said the central bank was opening the door to future rate cuts.

Erdoğan sacked former governor Naci Ağbal after he used his four-month term to aggressively raise rates to fight inflation and replaced him with former ruling party lawmaker Şahap Kavcıoğlu last month.

Erdoğan gave no explanation for his decision, but Kavcıoğlu has subscribed to the Turkish leader’s unconventional belief that high interest rates cause inflation instead of tamping it down.

“The language also suggests that they are looking for opportunities to lower interest rates,” said Capital Economics analyst William Jackson.

Kavcıoğlu is the fourth central bank chief Erdoğan has appointed since July 2019.

Earlier this month, Erdoğan said he was “determined” to see the interest rate return to single digits, and to “reduce inflation to single digits.”

But consumer prices keep rising and have now reached their highest level since July 2019, when Turkey was suffering from economic effects of a standoff with the United States the previous year.

In January, the bank said it expected inflation to be 9.4 percent by the end of 2021.

Former ruling party economy minister Ali Babacan, who now leads an opposition party, suggested Ağbal may have been sacked over plans to investigate what happened to the country’s foreign exchange reserves worth nearly $130 billion.

The bank is believed to have used the money to support the lira while keeping interest rates low in 2019-2020.

The issue has picked up steam in the past few days after the main opposition Republican People’s Party (CHP) started a campaign asking: “Where is the $128 billion?”

The lira has lost more than 8 percent in value against the US dollar since the start of 2021, despite a rally earlier this year as investor optimism in Turkey was renewed with Ağbal’s orthodox thinking.

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