Turkey keeps rates on hold in post-election uncertainty
July 23 2015 08:07 PM


A money changer counts Turkish lira bills at a currency exchange office in Istanbul. The lira - already one of the worst-performing major emerging market currencies this year - was hit again yesterday, hurt by the resurgent dollar after US jobless claims fell to a 41-1/2 year low and as more violence flared up in Turkey’s southeast.


Reuters/Istanbul



Turkey’s central bank kept interest rates on hold for a fifth straight month yesterday, avoiding any mention of the political uncertainty that has unnerved investors and instead focusing on food and energy prices.
Consumer confidence and the lira currency have weakened since Prime Minister Ahmet Davutoglu’s AK Party lost its majority at the polls last month, while annual inflation has remained high. The party has until late August to find a junior partner or face a snap election.
The central bank has been under pressure from President Tayyip Erdogan to cut interest rates, but economists say the country needs tighter policy to fight inflation.
Instead, a recent drop in food prices gave it enough room to leave policy unchanged again, as all 16 economists polled by Reuters had said it would.
“We actually think that the MPC is still underplaying the extent of Turkey’s inflation problem,” said William Jackson of Capital Economics, referring to the central bank’s monetary policy committee.
He said the MPC’s view of inflation didn’t seem to fully acknowledge the lira’s vulnerability to further weakening, particularly in view of the political situation.
While the AKP is in preliminary talks with the main opposition, progress appears to be slow.
Some government officials have admitted economic growth is likely to fall far short of Ankara’s targets this year.
“Food and energy price developments affect inflation favourably in the short run, while exchange rate movements delay the improvement in the core indicators,” the central bank said in a statement on its website.
The bank kept its one-week repo rate at 7.50% and the overnight borrowing rate at 7.25%. The overnight lending rate remained 10.75% and the primary dealers’ overnight borrowing rate 10.25%.
Reflecting the pressure on the central bank, Economy Minister Nihat Zeybekci said he did not view the rate decision positively. Like Erdogan, he has called for rate cuts.
The lira - already one of the worst-performing major emerging market currencies this year - was hit again yesterday, hurt by the resurgent dollar after US jobless claims fell to a 41-1/2 year low and as more violence flared up in Turkey’s southeast.
The currency is on track for its worst weekly performance since hitting a record low after the June 7 elections.
Investors are also worried about the possibility of early elections if Davutoglu’s AKP is unable to form a coalition.
The leader of the main opposition People’s Republican Party (CHP), which is in coalition talks with the AKP, said yesterday he saw an early election as more likely than a coalition.
All of that added up to a perfect opportunity for lira bears, said Murat Barisik, the deputy head of research at Ata Invest.
“The recent rise in violence and attacks and more talk of elections - along with the best US statistics in around 40 years - brought the selling.”



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