Turkey cenbank not even contemplating rate cuts now, deputy Akcay says

By Nevzat Devranoglu and Jonathan Spicer

ISTANBUL (Reuters) -Turkey's central bank is not even considering a rate-cutting cycle at this time because easing too early could reignite inflation and extend the pain for an economy on the verge of disinflation, Deputy Governor Cevdet Akcay said in an interview.

For now, he told Reuters, the bank is wrestling to convince sceptical companies and households that it will keep its tight policy for as long as it takes to secure a lasting disinflation period.

"A rate cutting cycle is not even contemplated at this point," Akcay said in his first media interview since President Tayyip Erdogan appointed him to the post a year ago.

This is because in Turkey - where inflation is the economy's main problem - the risk of premature policy easing and "rejuvenated inflation dynamics" is higher than the risk of waiting too long, he said.

"A rate cut is therefore not an agenda item at the moment, and will not be before a secular decline in the underlying trend of monthly inflation is observed and is accompanied by other indicators we closely follow," Akcay added.

"A central bank's natural tendency is to always err on the side of caution."

The hawkish message could cool expectations that the central bank will begin easing monetary policy in the fourth quarter, with some analysts forecasting a rate cut as soon as September. Others predict it will wait until early next year.

The lira strengthened to 32.95 against the dollar from 33.12 before Akcay's comments, in a move which three traders attributed to his messages stressing tight monetary policy.

Akcay, 63, is a key architect of Turkey's dramatic U-turn toward a more orthodox, high-rates policy meant to vanquish years of soaring prices that emerged under Erdogan's previous policy of easy money to boost economic growth.

Since June last year, the central bank has hiked rates to 50% and, since it last tightened in March, has pledged to remain vigilant to inflation risks. Annual inflation dipped below 72% last month, marking the beginning of what is expected to be a prolonged slide.

Yet even as economists predict inflation will be 30% in a year, a central bank survey shows Turkish households - stung by years of inflation and foreign-exchange volatility - rather see it at 71%, according to figures released in June.

Turks understandably still have a "pessimistic bias" given their past experiences and need to see "a secular downward trend in actual inflation" to be convinced, Akcay said at the central bank's Istanbul offices.

He said the bank will maintain a tight policy until the pace of improvement in households' expectations, moderation in domestic demand and underlying inflation data all confirm a "permanent and significant" decline in monthly inflation, which is expected to run near 1.5% after this month.

When rate cuts begin they "will be managed in a way to signal a tight stance in an unambiguous manner," Akcay said.

Companies also remain sceptical of disinflation, he said, which "has an overwhelming impact on the extent of slowdown required for disinflation."

The longer households and companies remain "unresponsive" to the bank's tight stance, "the higher will be the cost of in terms of output and employment," Akcay said.

June monthly inflation was 1.64% but July is expected to rise temporarily due to one-off factors.

"We pencil in a 1.5 points burden on July's monthly inflation due to price adjustments in administered prices and taxes," he said, adding this could lead to higher-than-expected inflation in July.

According to the central bank's latest survey of market participants' expectations, monthly consumer price inflation is seen at 2.77% in July.

Any surprises in the monthly rate will not require "immediate action" as long as the underlying outlook remains intact, Akcay added. The central bank expects year-end annual inflation of 38%, a bit below market expectations.

(Reporting by Nevzat Devranoglu and Jonathan Spicer; Editing by Daren Butler and Chizu Nomiyama)