Turkish Lira Drops to Record as Central Bank Keeps Rates on Hold

The lira weakened to a record after Turkey’s central bank kept interest rates on hold while predicting inflation would stay “markedly” above its targets.

The currency dropped as much as 1.3 percent to an all-time low of 2.2691 per dollar before trading 0.5 percent weaker at 5:36 p.m. in Istanbul. The lira has fallen for seven consecutive days, the longest stretch of declines since November, amid a corruption probe that’s roiled the government.

Morgan Stanley and Goldman Sachs Group Inc. were among four of 14 banks that expected Central Bank of Turkey Governor Erdem Basci to increase its 7.75 percent overnight lending rate by 50 basis points. Policy makers kept that rate, as well as the one-week repurchase and overnight borrowing rates unchanged, while acknowledging inflation will stay above 5 percent for some time.

“The bank recognizes that there is a threat from inflation now, but is unwilling to do that much about it,” Tim Ash, an economist at Standard Bank Plc, said in e-mailed comments. “The lira will continue to feel the strain.”

The drop today took the lira’s 2014 decline to 4.6 percent, the most among developing-country peers in Europe and Africa monitored by Bloomberg. Yields on Turkey’s two-year government notes increased three basis points, or 0.03 percentage point, to 10.19 percent.

Tighter Policy

While refraining from raising rates, the central bank sold $400 million in its daily auction today, the most this year. It has sold $1.7 billion for liras so far in January as part of a plan to sell a minimum of $3 billion by month end to support the currency.

Basci pledged on Dec. 24 that he’ll keep interest rates unchanged unless he sees a deterioration in inflation. A combination of liquidity tools and measures to limit growth in consumer loans will be employed before the bank makes any decision on rates, he said.

The central bank said today it will increase interbank interest rates to about 9 percent from 7.75 percent on days when it takes extra-tightening measures, by refraining from holding auctions of one-week repurchase agreements. A tighter liquidity policy is needed to make the inflation outlook consistent with medium-term goals, it said.

Price growth accelerated to 7.4 percent in December from 7.32 percent a month earlier, missing a forecast by analysts in a Bloomberg survey for a drop to 7.26 percent.

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