(Bloomberg) --
Turkey's central bank might look to moderate the pace of easing after two massive interest-rate cuts in three months.
The bank has limited policy space after “front-loaded” monetary easing in July and September, Governor Murat Uysal said in a rare public appearance in Ankara Wednesday. “A cautious stance in monetary policy will continue. The improving trend in inflation is expected to continue in the upcoming period,” he said.
Read more: Behind Erdogan's Strange Ideas About Interest Rates
Installed in July after President Recep Tayyip Erdogan ousted his predecessor at the central bank for not easing fast enough, Uysal has so far cut rates by 750 basis points, including by a record in his first month on the job. While the Monetary Policy Committee has already signaled limited scope for steeper moves, the governor's comments today are the clearest sign yet that there are limits to further stimulus.
“For any other central bank my interpretation would be that any further policy easing will only happen to the extent that is allowed by inflation moderation,” said Henrik Gullberg, a macro strategist at Coex Partners in London. “But markets will be hesitant to just take the new governor's word for it.”
As Turkey's economy is only starting to make up ground lost during a short-lived recession and there's little room for fiscal stimulus, the central bank is taking center stage for Erdogan, who believes that high rates cause rather than curb price growth. Inflation dropped to an annual 15% in August from an October high of 25.2%, and the central bank thinks it's likely to end the year below earlier forecasts.
Just days ahead of this month's rate meeting, the president laid down a marker for the central bank, suggesting borrowing costs will be cut to single digits soon and inflation will follow suit. The key rate is now at 16.5%.
As of Monday, traders were positioning for a cumulative 180 basis points of easing through the end of the year, said Christian Maggio, head of emerging-market research at TD Securities in London. While that's not a huge amount in the context of Turkey, “the comments will definitely put a lid on how much easing the market can and should expect,” he said.
The lira, which weakened as much as 0.3% against the dollar Wednesday, reversed losses after Uysal's comments and traded little changed as of 3 p.m. in Istanbul.
To contact the reporters on this story: Cagan Koc in Istanbul at ckoc2@bloomberg.net;Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net
To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, ;Lin Noueihed at lnoueihed@bloomberg.net, Adveith Nair, Paul Abelsky
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