* Political pressure seen as main rates on hold
* Covert tightening move through interbank market
* Lira falls to new low
* Erdogan "congratulates" bank on "appropriate" decision
By Seda Sezer and Daren Butler
ISTANBUL, Jan 21 Turkey's central bank shied
away from hiking its main interest rates on Tuesday despite a
tumbling lira and rising inflation, bowing to what many
investors see as pressure from a government bent on maintaining
growth ahead of elections.
The bank has been battling to defend the lira by selling
foreign exchange, adjusting money market liquidity and making
statements of confidence. But it has avoided the outright rate
hikes virulently opposed by Prime Minister Tayyip Erdogan.
"I congratulate them," Erdogan said of what
he called an "appropriate" decision to hold rates, though it
sent the lira to a record low and left investors
questioning the credibility of the central bank.
"This decision was a kind of referendum on central bank
credibility," said Neil Shearing, chief emerging markets
economist at Capital Economics in London. "The market was
waiting to see if it would respond to currency weakness in the
face of government pressure not to do so.
"It's obviously bowing to the pressure."
The government, preparing for local elections in March and a
presidential contest in August, has railed against high interest
rates and played down market turbulence triggered partly by a
corruption scandal which has shaken ministers.
The bank kept its main policy rate, the one-week repo rate,
at 4.50 percent, its borrowing rate at 3.50 percent and its
overnight lending rate at 7.75 percent.
But it acknowledged the threat from rising inflation and
announced what effectively amounted to a rate increase by the
back door, saying it would fund the interbank market at 9
percent on "additional tightening" days, when it cancels repo
auctions and sells dollars at auction.
Economists called it a "covert" move that would not reassure
investors but showed how far the bank was striving to tighten
monetary policy without touching its headline rates.
"The bar to aggressive rate hikes in Turkey is much higher
than in other vulnerable emerging markets," said Nicholas Spiro,
head of Spiro Sovereign Strategy in London.
"The politicisation of Turkish monetary policy is becoming
more pronounced with each passing day, boding ill for Turkish
A corruption scandal shaking the government has put
investors off Turkish assets in recent weeks, compounding
concerns about a reduction in the U.S. monetary stimulus that
has flooded Turkey and other emerging markets with cheap cash.
The lira has weakened some 10 percent against the dollar
since mid-December when the graft investigation first emerged,
extending a 17-percent fall in 2013, partly over uncertainty
about the central bank's willingness to lift rates.
The cost of insuring Turkish debt has risen to 18-month
Erdogan has cast both the corruption probe and
anti-government protests which shook Turkey last summer as part
of a foreign-backed plot to undermine the country's
international standing. He has blamed an "interest rate lobby"
of speculators for seeking to damage the economy by pushing for
"The decision taken by the central bank to leave rates
unchanged will be positive for Turkey, negative for the interest
rate coalition," Erdogan's chief economic adviser, Yigit Bulut,
said on his Twitter account.
Erdogan told reporters in Brussels that the central bank was
independent. He said: "I see the decision that the central bank
has taken today as appropriate and I congratulate them."
On the eve of the central bank decision, had played down the
turbulence in Turkish markets, saying it would be short-lived
and describing recent outflows as "trifling".
His new economy minister, Nihat Zeybekci, put it more
bluntly on Monday, saying he saw no risk from the lira's current
volatility and the central bank should not raise rates.
The lira initially slumped to a new low of 2.27 against the
dollar but later recovered some ground, trading at
2.25 by 1420 GMT. Default insurance costs in the five-year CDS
market hovered around 18-month highs, Markit data showed.
Five out of 15 economists in a Reuters poll had expected the
bank to make any move on the lending rate on Tuesday.
But a separate Reuters poll of 24 economists last week
forecast that the bank will have to increase its overnight
lending rate by a full percentage point to 8.75 percent by the
end of March to shore up the lira.