Turkish central bank keeps rates on hold in shock to market

The lira weakened after the CBRT decision and stood at 2.9486 at 13:25 GMT, from Monday’s close of 2.9130. REUTERS/Murad Sezer

ISTANBUL: Turkey’s central bank left interest rates unchanged Tuesday, a surprise move that reignited concern about political threats to its independence and put fresh pressure on the struggling lira currency. Analysts and investors have repeatedly called for a rate hike to rein in inflation and put a floor under the lira, which has been hit by escalating violence in Turkey’s mainly Kurdish southeast and by a rumbling dispute with Russia over a downed warplane.

However, the bank (CBRT) held fire for the 10th straight month, even though annual inflation spiked to 8.1 percent in November, well above an official 5 percent target.

The CBRT also said it would start to “simplify” policy from its next meeting in January if market conditions are stable enough – a nod to investors who have urged the bank to return to an orthodox system of using a single interest rate rather than its current, complex system of multiple rates. “Big questions will be raised again about CBRT independence. Even Turkey bulls like myself are left struggling to understand this one,” said Timothy Ash of Nomura International.

“The CBRT is arguing that simplification might start when volatility ends – that seems like just another excuse, frankly, not to tighten.”

The lira weakened after the CBRT decision and stood at 2.9486 at 13:25 GMT, from Monday’s close of 2.9130.

The CBRT has long faced political pressure to keep monetary policy loose, with President Recep Tayyip Erdogan repeatedly calling for rate cuts and even equating high interest rates with treason.

It had previously hinted that it would raise rates in tandem with the U.S. Fed. Hot on the heels of a Fed hike, Tuesday’s meeting was seen as a critical test of the bank’s independence and its governor, Erdem Basci.

Concerns about political pressure on monetary policy have spurred foreign investors to dump a net $6 billion in local bonds this year after at least three years of inflows. “Monetary policy simplification could begin with the next meeting, if the decline in volatility seen since the start of global policy normalization is lasting,” the bank said.

Its benchmark repo rate remains unchanged at 7.5 percent. It also held its overnight borrowing rate at 7.25 percent and its overnight lending rate at 10.75 percent.

Fourteen of 16 analysts polled had expected the repo rate and overnight borrowing rate to rise, with most tipping half percentage-point moves. “Today’s rate-setting decision speaks volumes about the conspicuous lack of inflation-fighting credibility on the part of Turkey’s monetary guardian,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy.

“This is a central bank whose conduct of policy can only be described as reckless and is increasingly perceived as politically motivated.”

A version of this article appeared in the print edition of The Daily Star on December 23, 2015, on page 5.




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