Turkish central bank keeps interest rates unchanged, lira slides

Turkey’s central bank left its benchmark interest rate steady at 19 percent. The lira slid against the dollar.

President Recep Tayyip Erdoğan’s replacement of the bank's governor in mid-March has raised concerns among investors that Turkey will keep monetary policy too loose in the face of accelerating inflation and a weak lira. New governor Şahap Kavcıoğlu has sympathised with Erdoğan’s aversion to high interest rates.

The central bank removed a pledge to tighten monetary policy if needed in a statement accompanying the decision.

"Dovish - clearing the deck to cut at the first opportunity," Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said in e-mailed comments. "Inflation is rising, the current account is widening, and reserves are falling. How can the CBRT cut without sacrificing the lira?"

Annual inflation in Turkey gained to 16.2 percent in March from 15.6 percent in February, the highest in major emerging markets outside of crisis-hit Argentina. Expectations for future price increases have deteriorated, meaning the bank has little or no room to cut interest rates without hurting the lira’s value and the inflation outlook. Many investors have called for a hike.

The lira rose briefly to as high as 7.97 per dollar after the central bank’s announcement, but lost ground soon after. It traded down 1 percent at 8.14 per dollar at 2:33 p.m. local time in Istanbul. It was not immediately clear whether state-run banks were active in the market to help support the lira, as they have been in previous months.

"The policy rate will continue to be determined at a level above inflation to maintain a strong disinflationary effect until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is reached," the central bank said.

The bank’s decision matched the predictions of economists surveyed by Reuters and Bloomberg.

Erdoğan sacked former finance minister Naci Agbal as governor overnight on March 19 after he raised interest rates from 10.25 percent during his four-month tenure to help steady the lira and rein in inflation. Ağbal also sought to investigate a sharp decline last year in the central bank's foreign currency reserves that left net reserves deeply in the red.

Ağbal's predecessor had spent tens of billions of dollars of the reserves and engaged in currency swaps with state-run banks in a failed attempt to defend the lira, which hit a record low of 8.58 per dollar in early November. He had also kept interest rates at below inflation to help the government engineeer a borrowing boom.

The reserve losses occurred during the tenure of former Treasury and Finance Minister Berat Albayrak, the son-in-law of Erdoğan who resigned the day after Ağbal was appointed. Opposition political parties have called for a full investigation, while Albayrak has not appeared in public since. 

(This story was updated with strategist's comment in the fourth paragraph, central bank in seventh.)