January 16, 2019 / 11:18 AM / 6 months ago

UPDATE 2-Turkey central bank holds rates at 24 pct after inflation retreats

* Cenbank keeps rates at 24 pct despite easing inflation

* Investors widely expected back to hold

* Some see rate cut coming in March (Adds analyst quotes, details and background)

By Daren Butler and David Dolan

ISTANBUL, Jan 16 (Reuters) - Turkey’s central bank left its benchmark interest rate unchanged on Wednesday as expected, allaying investor fears that it could loosen policy after inflation fell from a 15-year high due to a rebound in the lira.

The one-week repo rate was held at 24 percent, having been raised 11.25 percentage points last year. Nineteen of 21 economists in a Reuters poll had said they expected the rate to be kept steady. Two had forecast a rate cut.

There had been speculation the central bank could cut rates given a recent easing in inflation - the rate declined to around 20 percent in December, after peaking at a 15-year high of 25.24 percent in October. Investors also see the potential for political pressure for lower rates before March local elections.

“Leaving the rates unchanged was what the markets wanted to see but the rhetoric is also still about maintaining a hawkish stance,” said Kaan Nazli, a senior economist at Neuberger Berman.

“They have not gone softer, given that inflation has been on a downward trajectory and this is what markets wanted to see on both forward guidance and the rate decision. Now we are looking at March, and what will happen then.”

The lira firmed to 5.3825 against the dollar following the decision, from 5.4169 beforehand. It was at 5.3900 at 1111 GMT.

“While developments in import prices and domestic demand conditions have led to some improvement in the inflation outlook, risks on price stability continue to prevail,” the bank said in a statement, adding it had decided to stick with a tight policy stance until the inflation outlook displayed a significant improvement.

POLITICAL PRESSURE

President Tayyip Erdogan, a self-described “enemy of interest rates”, has repeatedly called for lower interest rates to keep credit flowing to the construction sector and broader economy. His comments have raised concerns about the central bank’s independence, helping spark a sell-off in the lira last year that further stoked inflation.

The central bank last hiked the repo rate in September to support the ailing currency. Following six straight years in the red, the lira has slipped 3 percent year-to-date, making it the worst performing emerging market currency so far in 2019.

“We still think they’ll probably push ahead with a rate cut at the next the meeting in March. The conditions macroeconomically seem to be in place and as long as there are no major moves in the lira, they will go ahead and ease policy,” said Jason Tuvey of Capital Economics, one of the two economists to forecast a rate cut.

“When it comes to the March meeting as well, campaigning for the local elections will have already been getting into gear and it is not unlikely that President Erdogan will come out and try and put pressure on the CBRT too to lower interest rates.”

Turks go to the polls for local elections on March 31. After a decade and a half in power and an economic boom gone sour, Erdogan’s AK Party could lose control of some large cities.

While Erdogan will continue to hold sweeping executive powers, a weak showing by the AKP would be a symbolic blow and illustrate how frustration over the economy has hurt a politician long seen as unbeatable. (Additional reporting by Ali Kucukgocmen in Istanbul and Karin Strohecker in London; Editing by Catherine Evans, Dominic Evans, William Maclean)

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