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Turkey’s Central Bank kept all key interest rates on hold on July 27, in line with market expectatio­ns. As expected, the bank kept its late liquidity window – the highest of the multiple instrument­s it uses to set policy – at 12.25% and left the benchmark repo rate at 8%.

“The central bank will continue to use all available instrument­s in pursuit of the price stability objective,” the bank’s monetary policy committee said in a statement. “A tight stance in monetary policy will be maintained until the inflation outlook displays a significan­t improvemen­t.” The central bank’s resistance to lifting the repo rate has triggered some concern among investors about its independen­ce in the face of government criticism.

“The statement accompanyi­ng today’s decision... once again struck a relatively hawkish note,” William Jackson of Capital Economics said in a note to clients. “Our sense, though, is that this hawkish stance will not last for too much longer.”

Muammer Komurculer, an economist at Is Investment in Istanbul, said: “All in all, it is good news to see the continuati­on of a tight stance despite an environmen­t where other EM peers are cutting policy rates. According to current money market rates, Turkey gives the highest nominal interest rate in the EM league. In terms of real rates, Turkey follows Brazil and Russia. This will help Turkey to attract foreign capital and keep the implied volatility of Turkish lira low until a deteriorat­ion in global risk appetite.”

“Finally, it is worth noting that with high inflation and high growth, Turkey does not have the same conditions as other EM’s

(Russia, Brazil, South Africa and Mexico) that eased their policy rates due to slowdowns in growth in a low inflation environmen­t. In this regard, we expect the central bank to keep its monetary policy stance tight until seeing a notable correction in inflation. In our view, the central bank will ease its monetary policy stance moderately through the end of the year,” he added.

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