Turkish central bank holds interest rates steady

Turkey’s central bank held its key interest rates steady on Wednesday, keeping the overnight rate at 7.75 percent, holding the line on a commitment to avoid using interest rates to shore up the lira.

The Turkish currency and government borrowing costs on the bond market were hit when the US Federal Reserve central bank signaled in May it might begin to taper its monetary stimulus, some of which had boosted asset prices in emerging economies.

The Fed has since signaled that markets had exaggerated the speed of tapering.

In addition, U.S. President Barack Obama nominated fiscal dove Janet Yellen as the next head of the Fed. Yellen is expected to maintain lax monetary policy for some time.

These two factors have eased the pressures of an outflow of investment funds on emerging economies such as Turkey’s.

On Wednesday, the Turkish central bank stuck to its promises not to rise interest rates.

The bank kept 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.

The central bank, statutorily independent, has 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.

“The committee will maintain the cautious monetary policy stance and continue implementing additional monetary tightening at the appropriate frequency until the medium term inflation outlook is in line with the medium term targets,” the bank said on its website.

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.