Turkish cenbank halts rate cuts after currency crisis

3 minute read

A logo of Turkey's Central Bank (TCMB) is pictured at the entrance of the bank's headquarters in Ankara, Turkey April 19, 2015. REUTERS/Umit Bektas

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ISTANBUL, Jan 20 (Reuters) - Turkey's central bank held its policy rate steady at 14% on Thursday as expected, halting an unorthodox and aggressive easing cycle that had sparked a currency crisis and sent inflation soaring to a 19-year high late last year.

The bank said it would monitor the impact of its previous policy decisions and expects the "disinflation process to start", bringing stability. It also said it began a "comprehensive review of the policy framework" in order to prioritise the currency and help meet its inflation mandate.

Under pressure from President Tayyip Erdogan, the central bank began easing in September, cutting its policy rate by 500 basis points to 14%.

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The bank signaled the pause last month, saying it would monitor the impact of the cuts in the first quarter but removed the timeframe in Thursday's statement. Bankers said they took it as a sign that the bank could wait longer before cutting again.

The cuts have already left real yields in deeply negative territory as inflation accelerated to 36%, and sparked a crisis that saw the lira lose 44% of its value against the U.S. dollar last year. The bank targets 5% inflation.

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Jason Tuvey, senior emerging markets economist at Capital Economics, said inflation is likely to rise over the next few months and remain around 40-45% for most of the year.

"If the central bank isn't hiking interest rates now, there is little reason at this stage to think that it will do so in the coming months," Tuvey said.

"We suspect that the next move in rates is more likely to be down than up as inflation should, barring another collapse in the lira, start to drop back towards the end of the year."

The lira firmed slightly after the decision and was at 13.34 versus the dollar at 1222 GMT.


Erdogan has rapidly overhauled the bank's leadership with like-minded officials in recent years, hammering its credibility.

The rate cuts were part of the president's unorthodox new economic plan that prioritises low interest rates and aims to boost exports, credit and employment.

The full-blown currency crisis was halted last month thanks partly to costly state interventions in the currency market as well as a scheme to protect lira deposits against forex depreciation.

With the volatility in the exchange rate largely settled this month, authorities have called on Turks - who snatched up record amounts of forex last month as the lira crashed - to convert them to the local currency.

The central bank said on Thursday it would review its policy framework "with the aim of prioritising Turkish lira in all policy tools."

The deposits under the government scheme have so far attracted 163 billion lira ($12.2 billion), Erdogan said on Wednesday. But Reuters has reported that most of that amount comes from existing lira accounts rather than dollars or euros. read more

($1 = 13.3160 liras)

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Reporting by Ali Kucukgocmen and Ezgi Erkoyun; Editing by Dominic Evans, Jonathan Spicer and Chizu Nomiyama

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