Turkish central bank ends series of rate hikes after lira stabilises

Turkey’s central bank left its benchmark interest rate on hold, halting a series of hikes designed to defend the fragile lira and rein in inflation.

The benchmark rate will remain at 17 percent, the central bank said in a statement on Thursday after a monthly meeting.

Last week, President Recep Tayyip Erdoğan, who has sacked two central bank governors in two years, called for lower interest rates in Turkey, citing rising borrowing costs for businesses. Some analysts said that Erdoğan’s comments rendered a rate increase more advisable to allay concerns about its independence.

The central bank was expected to keep interest rates unchanged, according to 28 of 34 economists surveyed by the state-run Anadolu news agency late last week. The remaining six foresaw an increase of between 0.5 percentage points and 1 percentage point.

Turkish central bank governor Naci Ağbal, appointed by Erdoğan in early November after the lira slid to a record low of 8.58 per dollar, has vowed to keep interest rates high this year to slow annual inflation from 14.6 percent towards the bank’s medium-term target of 5 percent.

After weakening briefly following the decision, the lira strengthened. It was trading up 0.4 percent at 7.38 per dollar at 2:30 p.m. local time in Istanbul, little changed from the morning.

Monetary policymakers “decided to maintain decisively the tight monetary policy stance for an extended period until strong indicators point to a permanent fall in inflation and price stability”, the central bank said in a statement accompanying its decision.

Foreign investors have been calling for tighter monetary policy in Turkey to help it underpin the fragile lira and rein in inflation. But Turkish businesses, including the owners of construction companies who are close to Erdoğan, are already feeling the pinch from higher interest rates and have voiced their frustration at rising loan costs

“A mistake in my mind, they should have hiked,” said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London. “Opportunity missed by Ağbal in my mind to get ahead of the curve. Maybe he is a mere mortal after all.”

JPMorgan Chase & Co. said before the decision that there was no fundamental reason for a hike, citing better central bank credibility and the lira's new-found stability.

Weighted average interest rates on commercial loans have surged to 20.9 percent annually from 15.9 percent a week prior to Ağbal’s appointment and 9.3 percent in July, according to central bank figures. The cost of a housing loan has more than doubled to 18.6 percent from 9.1 percent six months ago.

Reiterating that food prices and lira weakness were impacting inflation, the central bank also said that cost effects such as international commodity prices, supply constraints and an adjustment in wages were impacting inflation.

Erdoğan has long maintained that costs for businesses, including higher interest rates, are a main driver of inflation in Turkey.