Turkey Holds Rates on Weaker Lira as Political Pressure Wanes

  • Decision comes after politicians toned down calls for cuts
  • Central bank says weakening lira limits inflation improvement

Turkey’s central bank held all of its three main interest rates, citing the impact of a weaker currency on inflation. Government officials had issued a caution over the plunge in the lira before the decision.

The bank maintained its overnight lending, one-week repurchase, and borrowing rates at 8.25 percent, 7.5 percent and 7.25 percent respectively, it said in a statement. Economists surveyed by Bloomberg forecast a 25 basis point cut to the highest measure, with the middle and lower rates unchanged.

The monetary policy committee lowered the overnight rate at every monthly meeting since March amid government calls for easier credit conditions to revive Turkey’s slowing economy, but recent currency weakness led officials to tone down their demands. The bank said financial conditions aren’t as tight as they were, and that the lira’s depreciation had hindered efforts to lower inflation -- which remains well above the bank’s 5 percent target.

Currency weakness and other factors driving price increases “necessitate the maintenance of a cautious monetary policy stance,” the bank said.

Ahead of Thursday’s meeting, Yigit Bulut and Cemil Ertem -- both senior aides to President Recep Tayyip Erdogan -- said the bank could hold rates if warranted by global conditions. Ertem said last week that monetary policy wasn’t on “auto-pilot” for rate cuts, and that a lira weaker than 3.1 per dollar was unjustified.

Weaker Lira

The currency, which weakened as much as 5 percent over the four weeks since September’s rate meeting, trimmed earlier losses on Thursday following the rates decision, and was trading little changed at 3.0609 per dollar at 3:08 p.m. in Istanbul.

The bank’s decision, so soon after statements from Erdogans’ advisers, risks damaging its credibility as an independent regulator, Selin Sayek-Boke, the deputy head of the opposition party CHP, said on Twitter.

“If the central bank decision is being found out from an adviser, then there are no independent institutions,” she said. “If there are no independent institutions, then there is no predictability and stability.”

The bank didn’t immediately respond to an e-mailed request for comment.

The lira’s recent slump came amid growing expectations that the U.S. Federal Reserve will increase rates later this year, with the Turkish central bank seen heading in the opposite direction. Political uncertainty in Turkey after July’s failed coup attempt is also a key factor.

On Hold

The bank’s decision to keep rates the same means its plan to simplify monetary policy is also on hold for now. Policy makers want to narrow the so-called interest rates corridor, making the middle one-week repurchase rate equidistant from the upper and lower gauges. The bank said the next step in that process will depend on the data.

“In other words, the central bank announcement is implying that it might lower interest rates if the lira stabilizes,” said Ibrahim Aksoy, a strategist at HSBC Asset Management in Istanbul, who predicted on Wednesday that the bank would keep rates on hold. “If the lira permits, there might be another 25 basis points cut in the overnight lending rate in November.”

While easing access to credit remains an objective for the central bank, it may choose to do so without cutting rates this month, since a reduction now would limit its ability to respond to shocks, according to Goldman Sachs. Instead, Governor Murat Cetinkaya will probably use liquidity measures to ease access to credit, it said in a report before the decision.

Thursday’s statement from the bank omitted expectations for lower food prices which, according to September’s announcement, would help policy makers bring the inflation rate down in the short term. The bank’s year-end inflation forecast is 7.5 percent, compared to 7.3 percent in September.

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