Turkey’s central bank left all its main interest rates unchanged on Wednesday amid government pressure not to raise borrowing costs, opting instead for supplementary measures intended to support the lira.
The bank kept its main one-week repo rate at 7.50 percent, matching the median estimate in a Bloomberg survey of 23 economists. It also kept its overnight lending and borrowing rates at 10.75 percent and 7.25 percent respectively, according to a statement posted on its website.
Facing government pressure to keep rates down ahead of June elections, policy makers are seeking alternative monetary policy tools to support a currency that’s dropped more than 13 percent this year. The bank reduced the cost of one-week foreign exchange lending provided to commercial banks by 50 basis points for both euro and dollar loans. It also increased the partial interest payment made to banks for their lira reserves by half of a percentage point.
Several analysts had said before the decision that measures other than raising the bank’s main rates are unlikely to help the world’s worst-performing currency and bond markets. The bank’s fringe measures are complicating its monetary policy rather than shielding the currency, William Jackson, an economist at Capital Economics Ltd. in London, said. The lira fell as much as 1.34 percent after the decision and was trading 1.1 percent lower at 2.7140 per dollar as of 3:10 p.m. in Istanbul.
“The financial markets don’t seem convinced by today’s move,” Jackson said in e-mailed comments. The fact that policy makers resorted to supplemantery measures is “likely to reinforce concerns that the bank is unwilling to defend the lira by raising official interest rates,” he said.
The current political pressure made central bank Governor Erdem Basci reluctant to increase borrowing costs, said Piotr Matys, an emerging-market strategist at Rabobank in London.
“We continue to argue that only a rate hike will provide the battered lira with a sustainable relief against the U.S. dollar,” Matys said by e-mail after the rates decision. “Raising rates could be a bitter pill for the central bank’s critics to swallow, but it would be the most efficient way to discourage lira speculators and reduce the risk of a full-blown currency crisis unfolding just before the general election.”