Turkish central bank carefully tightens policy as political heat rises

ISTANBUL (Reuters) - Turkey’s central bank took another unorthodox tightening step on Thursday, hiking the cost of funds from its “late liquidity window” by 75 basis points while leaving conventional policy rates on hold ahead of April’s landmark political referendum.

Turkey's Central Bank headquarters in Ankara, Turkey, April 19, 2015. REUTERS/Umit Bektas

The bank’s decision to hike the cost of borrowing from its late liquidity window came a day after the U.S. Federal Reserve lifted rates. By leaving its three other rates, including the benchmark repo rate, steady, the Turkish central bank could fuel concern it is bowing to pressure from President Tayyip Erdogan.

Erdogan, an economic populist who has declared himself an “enemy” of interest rates, has railed against what he says is the high cost of credit in Turkey. Turks go to the polls on April 16 to vote in a referendum on a constitutional change that would give his office sweeping executive powers.

“The committee decided to strengthen monetary tightening in order to contain the deterioration in the inflation outlook,” the bank’s policy-setting committee said in a statement.

“The central bank will continue to use all available instruments in pursuit of the price stability objective,” it said, adding that food prices had contributed in recent months to sharp increases in inflation.

The Fed’s move made it easier for the Turkish central bank to follow suit, said William Jackson of Capital Economics in a note to clients.

“The Turkish central bank had good domestic reasons to tighten monetary policy today given growing concerns about inflation. But the Fed’s rate hike last night made their job easier by providing some cover from political pressure,” he said.

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The bank raised the late liquidity window rate to 11.75 percent from 11 percent, less than the 100 basis point hike that had been predicted by 15 of 23 economists polled by Reuters.

However, it left its overnight lending rate at 9.25 percent, contrary to the expectations of a hike from nearly half the economists polled.

It also left its benchmark one-week repo rate at 8 percent. All but one respondent in the poll forecast it would be unchanged.

It was unclear how the policy move would affect banks’ lending to consumers and businesses.

“The complexity of Turkey’s monetary policy setup can make it difficult to interpret decisions, but today’s move was clearly aimed at tightening monetary conditions,” Jackson said.

The lira firmed following the central bank’s move. It was at 3.6390 at 1254 GMT, some 1 percent firmer on the day.

Writing by David Dolan; Editing by Toby Chopra