Turkish Central Bank keeps interest rates on hold despite PM’s cut call

ANKARA

Central Bank Governor Erdem Başçı. AA Photo

The Central Bank decided to maintain three main interest rates in its policy meeting on April 24, vowing to keep up a tight monetary policy despite government pressure for a cut.

“Inflation expectations and pricing behavior will be closely monitored and the tight monetary policy stance will be maintained until there is a significant improvement in the inflation outlook,” the Bank said in a statement released after its Monetary Policy Committee meeting.

The bank held the kept the rates at the level it raised them to in January, with the overnight lending rate at 12.0 percent, the borrowing rate at 8.0 percent and the one-week repo rate at 10.0 percent.
Prime Minister Recep Tayyip Erdoğan, a vocal opponent of high interest rates, urged the bank to cut rates after his ruling party’s strong showing in the March local elections, which he said had reduced political uncertainty.

That revived concern about the independence of the Central Bank, and Başçı hinted only days later at the possibility of eventually cutting rates.

Ultimately, the Bank only reduced the late liquidity window lending interest rate from 15 percent to 13.5 percent, citing the recovering political conditions.

“The recent decline in uncertainties and partial improvement in the risk premium indicators have reduced the need for an additional tightening in liquidity policy. Accordingly, the Committee decided to deliver a technical cut in the late liquidity window lending interest rate,” the Bank said to explain its decision.

The Bank also said its earlier hike had shocked but soothed markets, and had helped to put a brake on the steep decline of the Turkish Lira and maintain a relative price balance.

“The Committee assessed that the strong and frontloaded monetary tightening delivered at the January interim meeting contained the adverse impact of upside risks on medium term inflation expectations,” the statement read.

The Turkish lira rallied to 2.1280 against the U.S. dollar from above 2.14, and 2.9434 against euro after the bank decision.