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Dec 13 2018

Turkish central bank keeps rates on hold citing inflation risk

Turkey’s central bank kept its benchmark interest rate on hold on Thursday citing risks to price stability.

The bank in Ankara left its benchmark rate at 24 percent, according to a statement on its website.

While there has been some improvement in the inflation outlook, policymakers decided to “maintain the tight monetary policy stance until the inflation outlook displays a significant improvement,” the central bank said.

Central Bank governor Murat Cetinkaya and his deputies had raised the benchmark one-week repo lending rate by 625 basis points to 24 percent in September seeking to halt a slump in the lira’s value that threatened a full-blown financial crisis. Many investors said the move was belated and were concerned that the bank might decide to lower rates at Thursday’s meeting after the lira firmed in recent weeks.

The lira initially rose as much as 1 percent in reaction to the central bank’s decision, but traded down 0.1 percent at  5.356 per dollar at 2:24 p.m. local time.

Trust in the central bank’s commitment to tight monetary policy has taken a hit this year because President Recep Tayyip Erdogan was seen as interfering in the bank’s work as the currency crashed. The lira fell to as low as 7.22 per dollar in August. Confidence in the central bank among investors has yet to fully recover despite successive government statements supporting its tighter monetary policy.

The central bank said on Thursday that it would deliver further monetary tightening if needed. It also emphasized that any new data or information might lead it to revise that stance.

The lira’s decline and a surge in inflation to the highest levels in 15 years mean that interest rates on loans are elevated. They exceed 30 percent per annum for most consumer and business loans. The increased costs of financing are taking their toll on economic growth – the economy contracted by a quarterly 1.1 percent in the three months to September, government data showed earlier this week.

Now Erdogan’s government is facing a dilemma – it wants to lower inflation of 22.6 percent but it is also facing local elections in March with the backdrop of a shrinking economy.

Consumer confidence is at the lowest levels since the global financial crisis of 2008. At the same time, an increasing number of firms are applying for legal protection from creditors as they struggle to repay loans taken out in liras and in foreign currency.

Trade Minister Ruhsan Peker said on Thursday that the number of limited and joint-stock companies declaring bankruptcy protection has reached 846. The number totalled 356 a month ago.