Turkey’s Central Bank leaves rates unchanged amid pressure

ANKARA-Reuters

Hürriyet Photo

Turkey’s Central Bank left interest rates on hold on March 17 as the lira’s slide to record lows risked stoking inflation, resisting pressure from political circles to cut rates ahead of a June election.

Erdoğan’s demands for sharply lower rates to boost growth before the parliamentary election have rattled markets, contributing to the lira’s losses and raising concern about the independence of the Central Bank.

The Bank left the 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.

“Future monetary policy decisions will be conditional on the improvements in the inflation outlook,” the bank said in a statement after the monetary policy committee meeting.

Tensions between Erdoğan and the Bank appeared to ease somewhat last week after Governor Erdem Başçı gave him a briefing. Erdoğan subsequently said the talks had been positive, but his adviser, Cemil Ertem, was quoted on March 16 as saying the presentation was at odds with Erdoğan’s vision for high growth.

“We think the Central Bank did the right thing and restored some of its lost credibility with that decision,” said BGC Partners chief economist Özgür Altuğ.

He forecast March annual CPI inflation would fall and may pave the way for a 25-50 basis point rate cut. But political reaction to the decision, the outcome of the Fed meeting on March 18, and a Fitch Ratings assessment on March 20 would determine whether a more optimistic market tone continues.

The lira firmed to 2.6070 against the dollar after the decision, from 2.6185 beforehand.

However, some market watchers said the Central Bank had more to do to restore its credibility.

“While Turkey’s Central Bank may have acted more prudently today, this is an institution whose authority has been severely undermined over the past several months,” said Spiro Sovereign Strategy’s managing director Nicholas Spiro.

“It will take much more than a decision to keep rates steady to allay concerns about the lack of credibility in Turkish monetary policy,” he added.

Annual inflation rose in February and inflation expectations have also worsened. Year-end inflation is seen at 6.98 percent, according to the latest central bank survey of business leaders’ and economists’ expectations, up from 6.77 percent a month ago.