Turkish Central Bank Holds Interest Rates

Turkish Central Bank Holds Interest Rates

Turkish Central Bank Holds Interest Rates

The FINANCIAL -- Turkey's central bank held interest rates steady for the fourth consecutive month on June 23 on a deteriorating inflation outlook and a weakening currency, with domestic political uncertainty also a factor after recent parliamentary elections, according to Nasdaq.

The Monetary Policy Committee said in a statement on the central bank's website that it kept the benchmark one-week repo rate at 7.5% and didn't change the interest rate corridor, ranging from the overnight borrowing rate of 7.25% to the overnight lending rate of 10.75%.

The decision was in line with forecasts by 12 economists surveyed by The Wall Street Journal.

"Inflation is expected to decline in the short term owing to a partial correction in food prices," said the central bank after its regular monthly policy meeting. "Yet recent movements in the exchange rates have delayed the improvement in the core indicators. This, combined with the uncertainty in global markets and volatility in energy and food prices, makes it necessary to maintain the cautious stance in monetary policy."

After the rate decision, Turkey's lira was 0.5% lower, trading at 2.6784 against the dollar compared with 2.6730 before the decision.

Benchmark two-year government bond yields rose to 9.98% from 9.95%. Bond yields rise as prices fall. Turkey's main BIST-100 stock index was down 0.6%.

The monetary policy committee's meeting on June 23 was its since Turkey's parliamentary elections on June 7, which led to the Justice and Development Party, known as AKP, losing its majority after 13 years in power. Politicians are jockeying to form the country's first coalition or minority government since 2002.

President Recep Tayyip Erdogan is expected to call on Ahmet Davutoglu, AKP's chairman and acting prime minister, to try to form a government. Mr. Davutoglu will begin coalition talks with other parties and if a government can't be formed within 45 days, a snap election may be held.

Some investors believe that a coalition government will be positive for markets, while no coalition government and early election could trigger a selloff in Turkish assets.

"Clearly, the central bank is more cautious considering the global and domestic volatility factors," said Mehmet Besimoglu, chief economist at Oyak Securities in Istanbul. "It is not yet clear whether a coalition will be established or whether the country will face snap elections in autumn. The central bank has been squeezing the lira liquidity rather than making a hike in the policy rate."

"The Turkish central bank kept its key interest rates on hold today, but the accompanying statement suggested that the MPC remains too sanguine on the inflation outlook and the risks posed by the large current account deficit, particularly amid the current domestic political uncertainty and looming Fed tightening," said William Jackson, emerging markets economist at Capital Economics in London. "We think rate hikes look increasingly likely over the next six to nine months."

Turkey's domestic political uncertainties could be exacerbated by anticipated U.S. Federal Reserve interest-rate increases this year, which are already sucking cash out of emerging markets.

The lira has tumbled 15% against the dollar this year, making it the second worst-performing emerging-market currency after the Brazilian real. The selloff is also making it more difficult for policy makers to rein in inflation toward the central bank's 5% target.

Some analysts suggest the central bank may need to raise interest rates in the second half of the year, should pressure on the currency persist. Turkey's central bank refrained from increasing interest rates, despite stubbornly high inflation, amid political pressure to lower interest rates to boost economic growth.

Last January, central bank Governor Erdem Basci more than doubled the benchmark rate to 10% to counter a massive emerging-market selloff and slow inflation.