Turkish Central Bank holds interest rates, shrugs off weak lira, political tensions

ISTANBUL - Reuters

HÜRRİYET photo

The Central Bank held interest rates steady on Aug. 18 after a drop in food and energy prices eased inflationary pressures, maintaining a cautious stance with one eye on political tensions that have driven the Turkish Lira to record lows. 

The lira plunged to 2.89 against the U.S. dollar following the Bank’s statement amid political uncertainties in Turkey. Prime Minister Ahmet Davutoğlu is expected to relinquish the mandate to form the next government after coalition talks failed, raising the prospect of another parliamentary election in the autumn after June’s indecisive vote.

Against that background, the Bank kept its one-week repo rate at 7.50 percent and the overnight borrowing rate at 7.25 percent. The overnight lending rate remained at 10.75 percent and the primary dealers’ overnight borrowing rate at 10.25 percent.

“Taking into account the uncertainty in domestic and global markets and the volatility in energy and food prices, the committee decided to implement a tighter liquidity policy as long as deemed necessary,” it said in a statement.

In a Reuters poll of 12 economists, eight had expected the key one-week rate to be left unchanged and four had forecast a 50-100 basis point hike.

Speaking before the Central Bank decision, Economy Minister Nihat Zeybekci said calls for higher interest rates did no good to Turkey and the recent appreciation of the dollar was “totally speculative.” 

Zeybekci said in another meeting on Aug. 17 that the plummeting lira was “not a cause for concern” given the nature of Turkey’s overall debt structure. He warned against intervention, saying the market “would reach its own level.” 

Government officials have said economic growth is likely to fall far short of Ankara’s targets this year.

The Central Bank also announced a road map amid the normalization period in global markets. While the Bank said it had composed the steps under three main headings, it didn’t give further details about what these measures are. In the document released on its website, the Bank said the “flexibility” of foreign exchange selling auctions would be increased in order to stem exchange rate volatility.

The lack of further details, however, have put additional pressure over the Turkish Lira, according to analysts. 

A representative from the Bank said the details will be shared with the public on Aug. 19 at the economists’ meeting. 

The lira has plunged more than 19 percent against the dollar this year, making it one of the worst-performing major emerging market currencies.

It is expected to remain under pressure with no sign of the political uncertainty easing in the near term, or an end to a cycle of violence in the country’s southeast pitting government forces against militants of the outlawed Kurdish Workers’ Party (PKK).

Under the terms of the constitution, President Recep Tayyip Erdoğan could dissolve Davutoğlu’s caretaker cabinet and call for the formation of an interim power-sharing government to lead Turkey to a new election within months if no deal is reached by Aug. 23.

Such a temporary arrangement would theoretically hand cabinet positions to four parties with deep ideological divisions, leaving policy-making paralyzed and deepening uncertainty.