Turkish cenbank keeps rates unchanged

Turkey’s central bank left its benchmark interest rate unchanged as expected on Thursday after inflation eased from a 15-year peak, but a change in the wording of the bank’s policy statement signalled possible loosening ahead.

The one-week repo rate remained at 24 percent, up 11.25 percentage points since the start of this year to counter soaring inflation and underpin the currency, which at one point lost almost half of its value against the dollar.

“The committee has decided to maintain the tight monetary policy stance until the inflation outlook displays a significant improvement,” the central bank’s monetary policy committee said in a statement.

In previous statements it said it would maintain the tight stance “decisively”, but that word was absent this time.

“The forward guidance by the central bank is absolutely crucial. Any tweak, any change to this sentence is quite critical at a time when the market has already started speculating for a rate cut,” Piotr Matys, Emerging Markets FX Strategist at Rabobank said.

The central bank should keep rates on hold at least to the end of the second half of 2019, Matys said, by which time the downturn in inflation could prove sustainable.

“If the central bank starts signalling that they may lower the rates in Q1, even in Q2, then the selling pressure on the lira may resurface, which in turn will be negative for inflation.” The currency firmed to 5.3050 against the dollar following the decision from 5.3560 directly before. By 1358 GMT it stood at 5.3285.

A lira crisis was sparked this year by concerns about the central bank’s independence and a diplomatic rift with the United States. President Tayyip Erdogan, a self-described “enemy” of interest rates, wants to see cheaper credit flowing to companies to boost economic activity, which lost momentum in the third quarter.