October 19, 2018 / 5:41 PM / a year ago

RPT-Turkish central bank seen leaving rates unchanged as lira rebounds

(Transmits to media subscribers)

* Central bank seen leaving one-week repo rate unchanged

* Inflation hit 15-year high in September

By Nevzat Devranoglu

ANKARA, Oct 19 (Reuters) - Turkey’s central bank is likely to keep interest rates on hold next week, a Reuters poll showed on Friday, after a mammoth rate hike last month and the release of a U.S. pastor appear to have underpinned the long-suffering lira.

The currency has recouped some losses in recent weeks, although it is still down by a third against the dollar this year. The sell-off sent inflation soaring to nearly 25 percent and, analysts say, raised the likelihood of a recession and a spike in bad debts at banks.

Twelve of the 15 economists polled by Reuters said they expected the central bank to keep its one-week repo rate unchanged at 24 basis points on Oct. 25. The remaining three expect hikes between 75-175 basis points.

“Despite significant disruption to the inflation outlook, financial conditions appear to be improving with political uncertainties decreasing recently and the risk perception towards emerging markets turning positive,” said Erkin Isik, chief economist at QNB Finansbank.

“The fall in the exchange rate, if lasting, could especially prevent further disruption in the inflation outlook. Moreover, by taking the sharp deterioration in the leading indicators for growth into consideration, we believe the central bank will hold off this meeting,” he said.

Last month the bank lifted the repo rate by 6.25 percentage points, its biggest interest rate increase in President Tayyip Erdogan’s 15-year rule. It has nearly doubled interest rates this year, tightening by a total of 11.25 percentage points.

Erdogan, a self-described “enemy of interest rates”, wants to see cheaper credit flowing to companies, particularly in the construction sector. His repeated attacks on interest rates undermined investor confidence in the central bank’s independence and caused the crisis.

The selling worsened with the diplomatic rift over a U.S. Christian pastor jailed by Turkey on terrorism charges. The case infuriated President Donald Trump, who doubled trade tariffs on Turkish steel.

A Turkish court last week released the pastor, Andrew Brunson, and he returned home to the United States.

Still, there are clear signs that there is pain ahead for the economy. Industrial production grew at its slowest pace in almost two years in August, recent data showed, reinforcing concerns about a sharp slowdown.

Economic growth is expected to fall short of sharply lowered government forecasts this year and next, with a recession now likely in the coming six months, a separate Reuters poll showed this month.

The central bank will announce the decisions of its next monetary policy committee meeting on Oct. 25 at 1100 GMT. (Writing by Tuvan Gumrukcu; Editing by David Dolan; Editing by Toby Chopra)

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