INERTIA

TURKEY’S CENTRAL BANK HOLDS RATES

Dünya Executive - - OVERVIEW -

Turkey’s central bank announced on March 7 that it would keep interest rates steady and policy tight until price pressures eased, signaling its intention to rein in inflation against a complex political backdrop. Year-on-year inflation has cooled from the 14-year peak of 12.98 percent it reached in November. But, at 10.26 percent in February, it remains one of the main imbalances in the economy and well above the bank’s target of 5 percent. Despite this, President Tayyip Erdogan has repeatedly called for cheaper credit to boost the economy, leading to concerns among investors that the nominally independen­t central bank is susceptibl­e to political influence. The bank last hiked rates in December, its first tightening in eight months.

Its monetary policy committee said in a statement that inflation and inflation expectatio­ns “continue to pose risks on pricing behavior,” with underlying indicators displaying “inertia.” It also said recent data indicated economic activity remained robust and domestic demand was continuing to expand. For a second straight meeting, the bank left all four of its policy-setting rates unchanged, as predicted by all 15 economists polled by Reuters. Nomura Internatio­nal economist, Inan Demir, said overheatin­g pressures and the susceptibi­lity of the lira to global and Turkeyspec­ific shocks meant the risks are skewed towards higher rates. “However, we do not expect the Bank to act unless the currency comes under severe pressure,” he said in a note to clients.

The bank kept its late liquidity window, the highest of the instrument­s it uses to set policy, at 12.75 percent. The overnight lending rate stayed at 9.25 percent and the overnight borrowing rate at 7.25 percent. Turkey’s economy has rebounded strongly from a downturn that followed an attempted coup in 2016, helped by a series of government stimulus measures. It grew by 11.1 percent year-on-year in the Q3 2017, its fastest expansion in six years. Annual GDP growth is expected to be over 7 percent in 2017.

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