Lira Swings as Central Bank Unexpectedly Leaves Rates Unchanged

  • Currency sank to record this week after seven months of cuts
  • Comments from president’s aides had signaled decision

Turkey’s lira reversed losses and government bonds extended their gains after the central bank kept interest rates on hold, defying expectations for a cut.

The lira swung between gains and losses before trading 0.1 percent higher at 3.0580 per dollar at 6:07 p.m. in Istanbul while the yield on 10-year government bonds fell 14 basis points to 9.77 percent. Policy makers left all three of the nation’s main interest rates unchanged on Thursday, citing weakness in the lira and other “cost factors.” Economists surveyed by Bloomberg had forecast a 25 basis-point cut to the overnight-lending rate.

The decision is the first time in eight months the central bank hasn’t lowered rates amid pressure from the government, which wants to prioritize growth in Turkey’s $700 billion economy. The decision not to cut followed comments this month from two of President Recep Tayyip Erdogan’s senior aides, who signaled the central bank could keep lending rates the same.

“The market was looking for a sign that the central bank will stop eroding the carry trade, so the decision to hold is a positive step in this direction,” said Cristian Maggio, the London-based head of emerging-market strategy at TD Securities who correctly predicted policy makers would leave rates unchanged. “They seem to acknowledge that the lira’s performance poses some limits to their capability to ease rates.”

Record Low

The central bank in March began simplifying monetary policy by moving toward a single rate, narrowing its three-pronged corridor with cuts to the overnight-lending rate. The direction and timing of further steps will be “data dependent,” policy makers said on Thursday, adding that future decisions will hinge on the outlook for inflation.

While the rise in the consumer price index slowed to 7.3 percent in September from 9.6 percent in January, it’s more than two percentage points above the policy maker’s target.

Carry Trade

Not only have the cuts made lira the worst-performer in emerging-markets in the past six months, they also reduced its appeal for carry traders, who get funds where interest rates are low to invest in currencies with higher returns. Investors that borrowed in dollars and invested in liras lost 3.9 percent over the past six months.

The resignation of the prime minister in May, a failed coup in July and subsequent credit-rating downgrades from S&P Global Ratings and Moody’s Investors Service have also added to pressure on the currency.

The central bank held the overnight-lending rate at 8.25 percent, and its one-week repurchase and overnight borrowing rates at 7.5 percent and 7.25 percent, respectively.

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