Turkey holds rates steady, sending lira to new low

While holding its rates, the Central Bank said it would make interbank interest rates rise to 9 percent

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Turkey’s central bank kept its key interest rates steady on Tuesday despite intense market pressure, sending the local currency plunging to new lows.

The bank’s decision had been expected after Economy Minister Nihat Zeybekci on Monday ruled out any hike in rates despite the currency’s rapid decline in the face of a deep political crisis.

The bank said in a statement after its monthly policy meeting that it was holding its key overnight rate at 7.75 percent, one-week repurchasing or repo rate at 4.5 percent and its borrowing rate at 3.5 percent.

However, the bank’s monetary policy committee also gave itself room for maneuver, saying: “Liquidity policies need to be tightened in order to make the inflation outlook compatible with its medium term targets.”

Also the bank said it would make interbank interest rates rise to 9 percent on “additional monetary tightening days.”

The lira was quoted at around 2.2548 to the dollar and 3.0505 to the euro shortly after the decision while the Istanbul stock exchange was up 0.94 percent to 66,381.88 points.

The central bank has been under pressure from Prime Minister Recep Tayyip Erdogan’s embattled government not to raise interest rates in order to boost growth and keep inflation in check.

Instead, it has been using its foreign currency reserves to shore up the currency, selling about $17.6 billion last year.

The currency has been on a sharp downward spiral since mid-December when police launched an anti-corruption probe that has embroiled members of Erdogan’s inner circle.

Most analysts had expected the bank to hold fire on any rate increases after Zeybekci said on Monday that the central bank should not raise rates “because it would be an inconclusive step and put a permanent burden on our economy.”

But London-based Capital Economics said “Today’s move adds to what is already a muddled monetary policy framework and will raise further questions about the credibility of the central bank.”

It added that “the lira is likely to come under further pressure.”

Turkey’s finances, like those of other emerging economies, are also under pressure over the U.S. Federal Reserve move to reduce its monetary stimulus program.

While the government has insisted its growth target of four percent for 2014 remains intact, Deputy Prime Minister Ali Babacan said last week that inflation might be higher than forecast because of the lira’s depreciation.

Turkey’s inflation was registered at 7.4 percent last year and the government had been predicting 5.3 percent for 2014.

The bank’s decision coincided with a pessimistic report card on Turkey issued by the European Bank for Reconstruction and Development.

The London-based EBRD cut its economic growth forecast for Turkey to 3.3 percent for this year from a previous estimate of 3.6 percent, blaming the impact of its domestic political crisis and tighter U.S. monetary policy.