Turkey Holds Key Rates as Expected on Inflation Outlook

  • Bank keeps late liquidity rate at 12.25%; in line with survey
  • Tight policy to remain in place until CPI outlook improves

Turkey’s central bank kept all its main interest rates unchanged on Thursday, and said it will keep policy tight until the outlook for consumer inflation improves. The lira strengthened.

The regulator held its late liquidity window and overnight lending rates at 12.25 percent and 9.25 percent respectively, matching the prediction of all analysts in Bloomberg surveys. The one-week repo and overnight borrowing rates were left at 8 percent and 7.25 percent, also in line with surveys.

Turkey began tightening monetary policy in January after the lira fell to a record low against the dollar. The currency has since stabilized, and the average cost of funding to commercial lenders is hovering just under 12 percent compared to a consumer inflation rate of 10.9 percent in June. That’s far above the long-term target of 5 percent, and the bank said it is prepared to tighten liquidity again if needed.

That reference made its statement “cautiously hawkish,” according to Ipek Ozkardeskaya, senior market analyst at London Capital Group. The decision to hold rates is a welcome development for investors in lira assets, especially after the U.S. Federal Reserve held rates and issued “dovish comments” on inflation on Wednesday, she said.

The lira traded 0.2 percent higher at 3.5313 per dollar at 3:08 p.m. in Istanbul.

“Although the decision was expected, we envisage the outcome of the meeting as sentimentally positive for Turkish assets, especially for the lira,” said Ozgur Altug, chief economist at BGC Partners in Istanbul.

Unlike its previous statement, the Turkish central bank cited the positive impact of the government’s counter-cyclical measures to help the economy. Turkey posted a record budget deficit in the first six months of the year, as the government rolled out stimulus after a failed coup last July pushed the economy into its first contraction since 2009 in the third quarter.

Gross domestic product grew 5 percent in the first quarter this year.

“Economic activity is expected to maintain its strength due to the supportive measures and incentives provided recently,” the bank said. A seasonal drop in food prices is also expected to bring inflation down, though the current elevated rate remains a key risk for pricing behavior, it said.

— With assistance by Selcan Hacaoglu

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