Turkey Central Bank Holds Interest Rates on Volatile Prices

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Turkey’s central bank left its main interest rates unchanged on Thursday, citing the need for cautious monetary policy in the face of volatile food and energy prices.

The bank kept its main one-week repo rate at 7.50 percent, matching the median estimate in a Bloomberg survey of 18 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.

Although recent drops in food and oil prices have helped consumer inflation slow, their volatility merits a cautious policy, the bank said. Core inflation has accelerated for two months in a row through June, a development that the bank blames on the currency.

“Food and energy price developments affect inflation favorably in the short-run, while exchange rate movements delay the improvement in the core indicators,” the bank said.

Concerns over prices have outweighed any encouragement gained from the slowdown in inflation, JPMorgan’s Istanbul-based economist Yarkin Cebeci said.

The bank “is likely to keep the liquidity tight in the coming weeks,” Cebeci said in an e-mailed report after the rates decision. It could “tighten the liquidity further, or even hike rates, in case the lira once again gets under pressure.”

Weakness in the currency and accelerating inflation have brought the bank’s easing cycle to an end after it cut the main repo rate by a total of 75 basis points during the first two months of this year. After accelerating for four months in a row, inflation slowed to 7.2 percent in June, compared to the bank’s 5 percent target.

The lira was trading 0.6 percent lower at 2.7244 per dollar at 3:16 p.m. It is the third worst performing currency this year among 24 emerging markets tracked by Bloomberg.

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