The lira fell toward a record after Turkey’s central bank kept all three of its main interest rates on hold amid accelerating inflation and jitters over the outcome of June’s parliamentary elections.
The Turkish currency declined 1.1 percent to 2.7155 against the dollar at 5:43 p.m. in Istanbul. Policy makers left the benchmark one-week repurchase rate at 7.5 percent for a third month, while overnight lending and borrowing rates were kept at 10.75 percent and 7.25 percent, respectively. A foreign-exchange lending rate was lowered by 50 basis points and interest on lira reserves was increased by the same amount.
The central bank held off raising interest rates even after the lira slid to repeated records in April and consumer-price growth picked up for a second month in March. It telegraphed today’s changes to the peripheral rates on April 14 and said policy makers might discuss “other measures to support stability in financial markets.”
The higher deposit rate is a “very technical adjustment that affects lira costs only marginally,” Pinar Uslu, a strategist at ING Bank AS in Istanbul, said by e-mail. “The market was thinking that the CBT might consider other measures. It seems that the bank is not in a hurry for that.”
The central bank said on April 14 it will consider lowering the rate charged for foreign-currency loans and a “measured” increase in the rate on required lira reserves of banks.
The benchmark rate has been at 7.5 percent since February. The central bank more than doubled it to 10 percent in January 2014 to arrest the lira’s decline to a then-record 2.39 per dollar, and began unwinding the increase in June.
While the lira has since weakened to as low as 2.731 on April 15, its real effective exchange rate, which takes inflation into account, remains above last year’s trough, giving policy makers room to hold rates down, according to some analysts.
Even though consumer-price growth accelerated for the past two months, to 7.6 percent in March, it’s still down from as high as 9.7 percent last May.
The yield on 10-year government bonds climbed five basis points on Wednesday to 8.91 percent, narrowing the spread with two-year yields to 0.98 percentage point, after closing yesterday at the widest since January 2012.
Borrowing costs have risen to a six-month high and the lira slumped 14 percent this year amid concern that an expected increase in U.S. interest rates will suck money out of Turkish capital markets. Turkish assets have also been under pressure as President Recep Tayyip Erdogan and members of the government loyal to him pressured the central bank to cut rates faster.
Some polls have shown that the Justice and Development Party that Erdogan founded may be weakened after June’s election, casting doubt on economic-policy continuity. Further uncertainty has been created by the probable departure of Deputy Prime Minister Ali Babacan, a force for economic liberalization within the administration, who will have to step down because of his party’s term limits.
Today’s “lira weakness might reflect nervousness as to how the government will react, or perhaps disappointment that the CBRT did not do more to limit” the currency’s decline, Timothy Ash, the chief emerging-market economist at Standard Bank Plc in London, said by e-mail.