Turkish central bank keeps rates unchanged after lira recovery, hefty hikes

Turkey’s central bank left its benchmark interest rate unchanged yesterday as expected, after a mammoth hike in September and an improvement in diplomatic relations with Washington helped the lira recoup some of its huge losses this year. The lira has plunged as ties with the US soured and each side imposed tit-for-tat sanctions and additional tariffs. At the heart of the rift was the detention in Turkey of a US pastor, who has now been released.

Lira

To underpin the currency and counter soaring inflation, the central bank last month ramped up its benchmark rate by 6.25 percentage points, in a move that also soothed investor concerns about the independence of the bank. But, with inflation at 24.52% last month, economists have said the central room has left itself little space to breathe, particularly as President Recep Tayyip Erdogan pushes for lower interest rates. “They had some scope to keep rates unchanged for the time being but that does not mean they are completely out of the woods yet,” said Per Hammarlund, chief emerging market strategist at SEB. “If they signal an easing on monetary policy until the end of the year, the lira is at great risk of experiencing another wave of weakness, another sell-off.” The bank left its one-week repo rate at 24% yesterday, having already raised its policy rate by 11.25 percentage points this year.


Twelve out of 15 economists in a Reuters poll had predicted the central bank would choose to leave its policy rate unchanged. The currency is still down a third against the dollar this year, but it has found support since the release of US pastor Andrew Brunson. “Although weaker domestic demand conditions will partially mitigate the deterioration in the inflation outlook, upside risks on the pricing behaviour continue to prevail,” the bank said in a statement. Erdogan, a self-described “enemy” of interest rates, wants to see cheaper credit flowing to companies to boost economy activity.


Even after last month’s big rate hike, Turkey is yet again without real interest rates — what economists call the rate once inflation is taken into account. “The Turkish central bank’s decision to leave interest rates unchanged today and the accompanying statement reinforce our view that last month’s aggressive rate hike didn’t represent a shift back to orthodoxy,” Jason Tuvey of Capital Economics said in a note. “Interest rates are unlikely to be raised further. Indeed, the bigger risk in our view is that the pressure for lower interest rates, that policy is loosened prematurely.” Even as inflation remains high, there are worrying signs of a slow-down. Central bank data showed Turkish manufacturing confidence fell to 87.6 points in October, its lowest level since April 2009.

Sources and photo-credits: Gulf Times