Reuters/Istanbul
Turkey’s central bank kept its main interest rates on hold yesterday, brushing off political pressure for cuts and saying it will keep monetary policy tight until the inflation outlook improves significantly, in comments that helped lift the lira.
The bank kept its overnight lending rate at 12%, its one-week repo rate at 10%, and its overnight borrowing rate at 8%, 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 by 1123 GMT, firming from 2.14 just before the rate decision. The currency remains susceptible to political risks in the run-up to a presidential election in August.
Analysts still expect rates in the months ahead, and the bank did cut its late liquidity lending rate to 13.5% from 15%, 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% to 13.5% 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 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% at the end of the year, well above the bank’s 6.6% forecast and its 5% medium-term target, the central bank’s monthly survey released on April 18 showed.
“Inflation expectations and pricing behaviour 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 January 28 after the lira hit a record low of 2.39 to the dollar. The bank defended that decision in its statement on 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.
