Central bank keeps interest rates unchanged as lira tumbles

Turkey’s central bank held interest rates on Tuesday after a drop in food and energy prices eased inflationary pressures, maintaining a cautious stance with one eye on political tensions that have driven the lira to record lows. The lira sunk multiple times on Wednesday, after the central bank failed to assuage investors’ concerns about its ability to defy political pressure and lift rates, and a violent bomb attack killed eight soldiers.

After the decision, the lira hit its weakest ever level against the dollar, falling as low as 2.8850, having traded at 2.8675 beforehand. It stood at 2.8820 at 1113 GMT. “And the upcoming Fed rate hike could greatly change external conditions”.

The bank also said it would narrow its interest rate corridor around the benchmark rate once global policies start to normalise, as part of a “roadmap” released separately on Tuesday to prepare for such policy shifts.

The central bank will put in place a series of measures that will increase the size and flexibility of banks’ holdings in foreign currencies. “Hence the steps taken by the central bank in the coming period will be determined by the Fed”.

Considering this delay and taking into account the uncertainty in domestic and global markets and the volatility in energy and food prices, the Committee decided to implement a tighter liquidity policy as long as deemed necessary.

Is Invest’s Komurcuoglu said he believed the policy rate, currently 7.5 percent, could be raised as far as 9.5 percent in the next six months.

Turkish Prime Minister Ahmet Davutoglu formally ended attempts to form the next government on Tuesday after weeks of coalition talks failed, raising the prospect of a fractious interim administration leading the country to a new election. Adjustments to banks’ borrowing limits and the level at which it remunerates lenders for compulsory reserves held in liras are also among the measures. “Generally speaking, the hikes in the policy rate in the coming months will be tied to the US Federal Reserve’s rate hikes”.

The main BIST 100 share index closed 1.25 percent lower at 76,922.44 points on Monday.