Turkey Holds Key Rate At 19 Percent

Turkey’s central bank on Thursday held its main interest rate at 19 percent while hinting that it may be lowered in the months to come.

The bank removed a key reference from its monthly statement promising high rates to fight inflation “for an extended period”.

It said instead that “the current monetary policy stance will be maintained until the significant fall in (inflation expectations) is achieved”.

The Turkish lira remained unchanged at around 8.31 to the dollar after the announcement.

Turkey’s annual inflation rate has edged up to 17.1 percent and is expected to keep growing for some months to come.

But President Recep Tayyip Erdogan subscribes to the unorthodox belief that high interest rates cause high inflation instead of slowing it down.

He replaced a market-friendly central bank chief who raised rates sharply during his four-month term with party loyalist Sahap Kavcioglu in February.

Kavcioglu has since promised to keep the central bank’s policy rate above that of inflation — signalling that it may be hiked should the inflation rate reach 19 percent.

The central bank repeated that statement on Thursday.

“High levels of inflation expectations continue to pose risks to the pricing behaviour and inflation outlook,” it added.

The lira has lost more than a tenth of its value since Kavcioglu’s appointment due to what analysts view as a further erosion in investor trust of the bank’s independence from Erdogan.

“We suspect that the central bank will begin cutting rates to appease President Erdogan and take the one-week repo rate down to 14.00 percent by year-end,” said Jason Tuvey of Capital Economics.

“But we think this will be an environment in which the lira comes under pressure and inflation remains elevated, forcing policymakers to reverse course in 2022.