Turkish central bank holds rates as crunch eases
Ankara (AFP) - Turkey on Wednesday kept its key overnight rate at 7.75 percent, holding to a promise not to raise rates in defence of the lira and helped by perceptions that US monetary stimulus will remain in place for some time.
The Turkish currency and government borrowing costs were hit when the US Federal Reserve signalled in May it might begin to taper its monetary stimulus, some of which had boosted asset prices in emerging economies.
The Fed has since signalled that markets had exaggerated the speed that it would withdraw, or taper, its stimulus.
But despite a hobbled lira and higher inflation, the central bank had been under pressure from Prime Minister Recep Tayyip Erdogan's government to hold rates down to sustain growth which has slowed sharply in recent years.
On Wednesday, the Turkish central bank, which is statutorily independent, kept all its main rates in place: the one-week repurchasing or repo rate at 4.5 percent, its borrowing rate at 3.5 percent and its key overnight lending rate at 7.75 percent.
But it added that it would remain "cautious" and would implement "monetary tightening at the appropriate frequency until the medium term inflation outlook is in line with the medium term targets."
Turkey has achieved strong economic growth in the last decade after severe financial crisis, exceeding 8.0 percent in 2010 and 2011. The government however predicts a growth of 3.6 percent this year and 4.0 percent for 2014.
In late July, the central bank raised its year-end inflation forecast to 6.2 percent in a sharp adjustment from 5.3 percent.
The central bank is fighting hard to shore up the depreciating Turkish currency, the lira, to fight inflation.
"Inflation is expected to fall further in the forthcoming period," said the bank.
"However, core inflation indicators are likely to hover above the inflation target for some time due to the exchange rate volatility observed during the recent months."
At Capital Economics in London, economist William Jackson suggested that the central bank's move to leave the key rates unchanged reflected the stabilisation of capital inflows but warned that monetary conditions were likely to remain tight in the coming months.
"While the financial markets have stabilised, the central bank isn't out of the woods yet. For a start, the current account deficit remains a major headache," he said.
Analysts say independent from uncertainties in the global financial realm, Turkey's economy has its own weaknesses mainly because of its dependence on credit as well as its wide current account deficit, which currently stands at around 7 percent of the gross domestic product.
Jackson said: "We wouldn't rule out further hike rates" in the event that concerns about a tightening of global monetary conditions resurfaced, and the lira came under renewed pressure.
The lira, which was quoted 1.9753 against the dollar at Wednesday's close, hit a record low in September against the US currency when it touched 2.0839.
