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Turkish central bank stands firm on rates

File - A money changer counts Turkish lira bills at a currency exchange office in Istanbul January 24, 2014. (REUTERS/Murad Sezer)

ISTANBUL: Turkey’s central bank kept its main interest rates on hold Thursday, brushing off political pressure for cuts and saying it would keep monetary policy tight until the inflation outlook improved significantly.

The bank kept its overnight lending rate at 12 percent, its one-week repo rate at 10 percent, and its overnight borrowing rate at 8 percent, as predicted by all but one economist in a Reuters poll.

“Today’s CBT statement sounds like that of a truly independent central bank that is providing forward guidance on less need for additional tightening (with which we agree), while at the same time highlighting that a move away from its ‘tight’ stance will come only when there is a significant improvement in the inflation outlook,” said Simon Quijano-Evans, head of emerging markets research at Commerzbank.

The lira was trading at 2.1300 against the dollar at 11.23 a.m., firming from 2.14 just before the rate decision. The currency remains susceptible to political risks in the runup to a presidential election scheduled for August.

Analysts still expect rates to change in the months ahead, and the bank did cut its late liquidity lending rate to 13.5 percent from 15 percent, saying a recent decline in uncertainties and a slight improvement in risk premium indicators reduced the need for any more tightening in liquidity.

“We do see the possibility of policy rate cuts again in the coming months, and today’s ‘technical’ cut of the late liquidity lending rate from 15 percent to 13.5 percent should be seen as a first step in this direction,” Quijano-Evans said.

Turkey’s economic growth in the past decade has been underpinned by stability during most of Prime Minister Recep Tayyip Erdogan’s rule, which began in 2002.

But growth has slowed sharply, inflation is now above target and consumer confidence has hit a four-year low.

Business leaders and economists expect inflation to stand at 8.12 percent at the end of the year, well above the bank’s 6.6 percent forecast and its 5 percent medium-term target, the central bank’s monthly survey released on April 18 showed.

“Inflation expectations and pricing behavior will be closely monitored and the tight monetary policy stance will be maintained until there is a significant improvement in the inflation outlook,” the central bank said in a statement.

The central bank implemented a round of huge rate hikes at an emergency meeting on Jan. 28 after the lira hit a record low of 2.39 to the dollar. The bank defended that decision in its statement Tuesday.

“The strong and frontloaded monetary tightening delivered at the January interim meeting has contained the adverse impact of upside risks on medium-term inflation expectations,” it said.

Erdogan, a vocal opponent of high borrowing costs, has urged the bank to cut rates after his ruling party’s strong showing in March local elections, which he said had reduced political uncertainty.

That revived concern about the independence of the central bank, and Governor Erdem Basci hinted just days later at the possibility of eventually cutting rates.

The bank then pushed through what was effectively a rate cut by the back door, lowering the average cost of funding through its repo auctions. The average cost of borrowing fell to as low as 10 percent, but the bank tightened liquidity again last week, pushing overnight rates higher.

The bank had for months been struggling to defend the lira by burning through its currency reserves and trying to squeeze up borrowing costs on the margins without resorting to outright rate hikes.

 
A version of this article appeared in the print edition of The Daily Star on April 25, 2014, on page 5.

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Summary

Turkey's central bank kept its main interest rates on hold Thursday, brushing off political pressure for cuts and saying it would keep monetary policy tight until the inflation outlook improved significantly.

The bank kept its overnight lending rate at 12 percent, its one-week repo rate at 10 percent, and its overnight borrowing rate at 8 percent, as predicted by all but one economist in a Reuters poll.

Analysts still expect rates to change in the months ahead, and the bank did cut its late liquidity lending rate to 13.5 percent from 15 percent, saying a recent decline in uncertainties and a slight improvement in risk premium indicators reduced the need for any more tightening in liquidity.

Business leaders and economists expect inflation to stand at 8.12 percent at the end of the year, well above the bank's 6.6 percent forecast and its 5 percent medium-term target, the central bank's monthly survey released on April 18 showed.


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