January 19, 2016 / 1:57 PM / 4 years ago

UPDATE 2-Turkish central bank keeps rate on hold despite pressure on lira

(Adds details and comment)

By Daren Butler and Behiye Selin Taner

ISTANBUL, Jan 19 (Reuters) - Turkey’s central bank left its main interest rate unchanged at 7.5 percent for the 11th straight month on Tuesday, a widely expected move that could put more pressure on the country’s languishing currency.

The lira has weakened sharply against the dollar since late December, when the bank surprised markets by leaving rates on hold. That decision was widely seen as bowing to pressure from President Tayyip Erdogan, who has repeatedly railed against high rates.

Investors say the central bank is long overdue for a rate increase, both to rein in inflation - now hovering at more than 8 percent, far above an official target of 5 percent - and to put a floor under the lira, which has been hit by worries about political influence on monetary policy.

“The Turkish central bank’s decision to keep its key interest rates on hold today, despite pressure on the lira and the deteriorating inflation outlook, adds to the impression that monetary policy moves are being swayed by government influence and will further damage the central bank’s credibility,” William Jackson of Capital Economics said in a note.

The bank also stuck to its overnight borrowing rate at 7.25 percent and its overnight lending rate at 10.75 percent. A Reuters poll of 19 analysts this month found that all but one expected the bank to leave rates steady.

Given the tumbling lira currency and mounting inflation, it “beggars belief” that rates have not been raised already, said Nicholas Spiro of Spiro Sovereign Strategy, a consultancy.

“The longer Turkey’s central bank refrains from raising rates, the stronger the perception that its hand is being forced by Mr Erdogan’s economics team and the greater the strain on Turkish assets at a time when sentiment towards emerging markets is particularly bleak,” Spiro said.


The bank also stayed mum on plans to simplify its complex system of using multiple interest rates. The bank said last month it would start to simplify policy once market conditions were stable enough. Investors have been waiting for any new signals the bank could move toward a more orthodox system of using a single interest rate.

Instead, the bank said it “assessed the heightened global volatility since the beginning of the year and the January inflation report forecasts”.

Now, that overhaul may not come until at least April, when Governor Erdem Basci is due to be either re-appointed or replaced, said Ozgur Altug of BGC Partners.

“We sense that the CBT postponed its monetary policy normalisation/simplification further with this decision,” Altug said.

The bank had previously hinted that it would raise rates in tandem with the U.S. Federal Reserve. After the Fed raised rates last month, Turkey was also expected to hike rates in December. When it did not, investor concern only worsened.

Earlier this month, the lira broke through 3.0 to the dollar for the first time since October. It has remained stubbornly above the symbolic threshold since, weighed down by global market fears. (Additional reporting by Nevzat Devranoglu; Writing by David Dolan; Editing by Jeremy Gaunt/Nick Tattersall, Larry King)

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