Turkey leaves interest rates on hold

ISTANBUL - Reuters

The bank kept its overnight lending rate at 12 percent, its one-week repo rate at 10 percent, and its overnight borrowing rate at 8 percent. REUTERS photo

Turkey’s central bank kept interest rates on hold on March 18 after a huge emergency hike in January helped stabilize the lira, shying away from further tightening for fear of hitting growth as an election cycle begins.

The bank kept its overnight lending rate at 12 percent, its one-week repo rate at 10 percent, and its overnight borrowing rate at 8 percent, as predicted by all 14 economists in a Reuters poll.

It said it would maintain its tight policy stance until there is a significant improvement in the outlook for inflation, to which it said upward risks remained significant.    

The central bank’s monthly survey of business leaders and economists showed on March 15 that they expect inflation to stand at 7.98 percent on average, well above the bank’s 6.6 percent forecast and its 5 percent medium-term target.

The lira was trading at around 2.22 against the dollar in the afternoon, little changed from just before the rate decision.

The lira has been hit by a corruption scandal engulfing the government since mid-December and by concerns about cuts to the U.S. stimulus program which has flooded Turkey and other emerging markets with cheap cash. Tensions over Ukraine have also added to pressure.

The central bank stunned investors by hiking rates by some 500 basis points at an emergency meeting on Jan. 28 after the lira hit a record low of 2.39 to the dollar the previous day.

Prime Minister Tayyip Erdoğan has been a vocal opponent of higher borrowing costs, seeing them as a threat to growth ahead of elections beginning with municipal polls on March 30, and the central bank’s move stunned investors concerned about the extent of its independence.

The bank had for months been struggling to defend the lira by burning through its currency reserves and trying to squeeze up borrowing costs on the margins without resorting to outright rate hikes.