Jan 18 2018

Turkey central bank keeps rates on hold as U.S. tensions hurt lira

Turkey’s central bank left its key interest rates on hold despite pressure exerted on the lira by tensions with the United States.

The central bank said on Thursday that it had left the repo rate at 8 percent, the overnight borrowing rate at 7.25 percent and the late-liquidity window at 12.75 percent.

The lira has slid over the past week after President Recep Tayyip Erdoğan threatened an invasion of northern Syria over U.S. support for a Kurdish army there. Yesterday, U.S. Secretary of State Rex Tillerson sought to diffuse the situation, saying comments concerning the plans hadn’t been relayed correctly.

In its statement, the central bank said current levels of inflation were elevated and inflation expectations continued to pose risks. Inflation eased to 11.9 percent in December from almost 13 percent the previous month.

The bank increased the late liquidity rate by half a percentage point to 12.75 percent in December after tensions with the United States over allegations of Iran sanctions-busting by senior Turkish officials helped spur a slump in the lira’s value.

The central bank could come under pressure to act swiftly should the lira start to slide again. The current 12.75 percent rate means margins between inflation and interest rates are much narrower than in other major emerging markets, making the lira more susceptible to political tensions or an increase in U.S. interest rates.

The lira was little changed after Thursday’s decision at about 3.8 per dollar.

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