Turkish central bank holds interest rates

ISTANBUL - Turkey's central bank left its interest rate unchanged at 24 percent on Thursday as expected but dropped a previous reference to possible further tightening if needed to address inflation, a dovish shift that hit the Turkish lira.

The central bank, under pressure after a month-long selloff in the currency, made the most substantial adjustment to its policy statement since September, when it last hiked rates to face down a full-blown currency crisis.

The bank nodded to higher food prices -- which have spiked nearly 30 percent, exacerbating Turkey's recession -- and reiterated that it would keep a tight stance until it sees a significant improvement in overall inflation.

But analysts noted it did not repeat a statement from March in which it said, "if needed, further monetary tightening will be delivered." Instead it said: "Factors affecting inflation will be closely monitored and monetary stance will be determined to keep inflation in line with the targeted path."

In response, the lira slid 1.6 percent and stood at 5.9820 against the dollar at 1238 GMT, its weakest value since Oct. 12. The lira was on track for its worst month since August, when the crisis took hold, slicing its value by some 30 percent last year.

It has weakened another 10 percent this year due to strained US diplomatic ties, challenges by President Tayyip Erdogan's AK Party to election results in Istanbul, and a drawdown in reserves that could leave the central bank with little room to cushion another crisis.

'Off the radar'

Cristian Maggio, head of emerging markets strategy at TD Securities, said removing the nod to further tightening was "a major change and signals an even more dovish turn" at the bank.

"It does not mean they will not tighten if needed but it does mean that it's fallen off their radar," he said. "It indicates possibly that there could be further political pressure to lower rates or it shows they don't face reality in the same way as markets."

The central bank held its benchmark one-week repo rate at 24 percent, after having raised it 11.25 percentage points last year. In a Reuters poll, all 16 economists had said they expected the rate to be kept steady, paving the way to a rate cut around July.

Overall inflation has eased from a 15-year peak of 25.24 percent in October, though it has edged higher again in recent months, to 19.71 percent in March. The central bank repeated that sagging demand has led to "some improvement" in inflation.

"Higher food and import prices and the elevated course of inflation expectations point to continued risks to price stability," the central bank added.

Last year's currency meltdown was set off by a separate rift between Ankara and Washington, and worries over central bank independence given pressure from Erdogan to cut borrowing costs to boost growth. The economy tipped into recession last year, pushing unemployment up to nearly 15 percent in February.

Inflation

Erdogan, a self-described enemy of interest rates, had regularly criticised monetary policy in the past but has been relatively quiet on the issue in recent months.

"Given the inflation situation, it is not appropriate" to close the door to further rate hikes, said Ulrich Leuchtmann, head of FX & EM research at Commerzbank in Frankfurt.

"The market simply doesn't trust Turkish monetary policy and that could accelerate a depreciation, which is what we are seeing just now."

Turkey's dollar-denominated bonds extended earlier losses after the central bank decision.

According to the Reuters poll, economists expect the central bank to cut the benchmark rate by around 250 basis points by year-end.

Three economists predicted a first rate cut would come in June while four pointed to July, according to the poll. One predicted September, another October, while one expected the central bank to leave rates unchanged throughout this year.