* Turkey's main interest rates on hold as expected
* Lira recovered some losses since huge rate hike last month
* Lira, 10-year yield largely unchanged after decision
* Central bank says to keep policy tight to fight inflation
By Seda Sezer
ISTANBUL, Feb 18 Turkey's central bank kept
interest rates on hold on Tuesday after hiking them sharply last
month to help stabilise the lira, shying away from further
tightening for fear of hitting growth ahead of elections next
The bank kept its overnight lending rate at 12 percent, its
one-week repo rate at 10 percent, and its overnight borrowing
rate at 8 percent, as predicted by all 16 economists in a
It said it would maintain its tight stance until there is a
significant improvement in the outlook for inflation, which it
expects to remain above its 5 percent target for some time.
"Having hiked interest rates in an extremely aggressive and
somewhat panic-stricken manner last month, Turkey's central bank
is taking a much-needed breather and is hoping its much stronger
anti-inflationary stance will be enough to establish
credibility," said Nicholas Spiro, head of London-based Spiro
"While a lot hinges on market sentiment towards emerging
markets, concerns are already shifting from the current account
deficit to the bleaker prospects for growth. The politics of
Turkish monetary policy are taking centre stage," he said.
The bank stunned investors by hiking rates by some 500 basis
points at an emergency meeting on Jan. 28, initially sending the
lira sharply higher from record lows and helping short-circuit a
vicious cycle of selling in emerging markets.
The move, which bolstered the bank's credibility in the eyes
of investors, had been opposed by Prime Minister Tayyip Erdogan.
Bent on maintaining economic growth ahead of an election
cycle starting with local polls next month, the prime minister
has been a vocal opponent of higher borrowing costs.
The bank had for months been struggling to defend the lira
by burning through its currency reserves and trying to squeeze
up borrowing costs on the margins without resorting to outright
rate hikes, a battle it was clearly losing.
The lira was trading at 2.1810 against the dollar
by 1234 GMT, largely unchanged from just before the
rate decision. It remains comfortably off the record low of 2.39
hit on Jan. 27.
But economic storm clouds are gathering and the lira could
come under renewed pressure in the coming months, with a
potentially turbulent election period ahead and Turkey's huge
trade shortfall leaving it one of the most vulnerable emerging
markets to the winding back of U.S. monetary stimulus.
Data last week showed the current account deficit widened
more sharply than thought in December, with the gap for 2013
expected to reach around 8 percent of GDP.
The central bank's survey of businessmen and economists
meanwhile showed inflation expectations continue to deteriorate,
with CPI seen rising 7.92 percent at year-end, well above its
own forecast of 6.6 percent.
"This alone will likely to prevent central bank from tuning
down its hawkish bias anytime soon," said Erkin Isik, a
strategist at TEB-BNP Paribas.
The main Istanbul share index fell 0.51 percent to
65,261.89 points, underperforming the wider emerging markets
index .MSCIEF, which fell 0.20 percent.
The yield on the 10-year benchmark bond was
little changed at 10.25 percent from 10.24 percent on Monday.