Turkish Central Bank leaves key rates unchanged as inflation remains high

ISTANBUL - Reuters

A tug-of-war is ongoing between the government and the Central Bank over interest rates. AA Photo

The Turkish Central Bank has left its key interest rates unchanged, despite slowing economic growth, as it battles stubbornly high inflation and pressure on the lira in the face of an expected tightening in U.S. monetary policy.

The lack of action was expected, although it was the first time since April that rates had been kept on hold. The bank said it would leave policy tight in Turkey until the outlook for inflation improves significantly.

“Elevated food prices continue to delay the improvement in the inflation outlook,” the bank said in a statement on its web site. “Meanwhile, declining commodity prices are expected to limit upside risks on inflation.”

The bank left its one-week repo rate at 8.25 percent, its overnight lending rate unchanged at 11.25 percent, its primary dealers overnight borrowing rate at 10.75 percent and its overnight borrowing rate at 7.50 percent.

The Turkish lira exceeded 2.25 against the dollar, its weakest in seven months, after the rate decision, continuing its weak performance.

All 14 economists polled by Reuters forecast the central bank would leave its main one-week repo rate at 8.25 percent. Two predicted a 50-basis-point cut and one predicted a 25-basis- point cut in the overnight lending rate.

“The Central Bank faces a tricky balancing act. Inflation is uncomfortably high and the current-account deficit, though it has narrowed, is still a weak spot,” said Neil Schearing, head of emerging markets research at Capital Economics.

He said the economy was struggling and growth will slow from the pace set in the first quarter.
The country is especially sensitive to changes in global liquidity because of its large current account deficit, which was easier to finance during the years of cheap U.S. funding.

The Bank last month unexpectedly lowered its overnight lending rate, which was considered more a signal to a government keen for rate cuts that it was supporting the economy.