Turkey’s Central Bank leaves policy rate unchanged, defying expectations

ANKARA

The Turkish Central Bank has decided to keep the one-week repo rate -- policy rate -- constant at 17.75 percent, bucking expectations of an increase after inflation spiked to a 14-year high in June.

The Turkish Lira, which has lost some 20 percent of its value so far this year, weakened to 4.91 against the dollar following the decision on July 24, from 4.7605 directly before. The lira slightly eased to 4.89 late afternoon.

Fifteen of 16 economists in a Reuters poll had forecast an increase, with an increase of 100-125 basis points seen as the most likely option.

“Cost factors and volatility in food prices have been the main drivers of the recent upsurge in inflation. On the other hand, price increases have shown a generalized pattern across subsectors. Despite the milder impact of demand conditions on inflation, elevated levels of inflation and inflation expectations continue to pose risks on the pricing behavior. Accordingly, the Committee assessed that it might be necessary to maintain a tight monetary stance for an extended period,” said the Bank in a statement.

“The Central Bank will continue to use all available instruments in pursuit of the price stability objective. Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement. Inflation expectations, pricing behavior, lagged impact of recent monetary policy decisions, contribution of fiscal policy to rebalancing process, and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered,” it added.

Inflation hit its highest in 14 years in June, at 15.39 percent, as the weakening lira drove up food and other prices.

“It’s a disappointing decision given that inflation accelerated further in June and is likely to rise even more in coming months as a result of the weaker lira,” said Piotr Matys, emerging markets forex strategist at Rabobank.

“This is a surprising decision that re-ignited the selling pressure on the lira,” he added, as quoted by Reuters.

The Bank has raised rates by 500 basis points since late April in an effort to put a floor under the currency.

Investors keep a close eye on the direction of economic policy as Turkey’s widening current account deficit and double-digit inflation have increased concern the economy is overheating and could be headed for a hard landing.