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Turkish central bank holds key interest rate at 19%; lira stays at 10 to euro

erdogan hand on heart
Turkish President Tayyp Erdogan

Turkey’s central bank announced in a press release on Thursday that it chose to keep its key interest rate unchanged at 19 per cent, in a move widely anticipated by analysts.

The Turkish lira remained at the record level of 10 to the euro, 8.30 to the dollar after the announcement.

Most analysts felt that holding rates this time was  a dovish signal, and that a rate cut could be expected shortly.

Timothy Ash, senior emerging markets strategist at Bluebay Asset Management, described the central bank’s latest move as “clearing the deck to cut at the first opportunity.”

Goldman Sachs highlighted the fact that the bank had crucially removed its bias toward tightening interest rates from its press release.

“Hence, we see higher risks of a premature rate cut or easing through increased lending,” Goldman said, though the investment bank does not see the country having the room to cut interest rates any further until the fourth quarter of this year.

Inflation is currently at 17.14 per cent in Turkey, and many analysts felt that this dovish signal will send the lira lower against major currencies, hurting consumers ability to pay for necessities. The central bank has no ‘dry powder’ to push prices lower, and no reserves to support the lira — central bank reserves are currently at negative $48 billion.

Goldman Sachs sees inflation rising toward 18 per cent year-on-year in April and foresees the country’s current account deficit widening. “A premature rate cut under these conditions could lead to renewed lira volatility, which we think will be the main constraint to how early the TCMB eases,” the bank wrote.

As recently as April 7, Turkish President Recep Tayyip Erdogan promised to cut interest rates while, at the same time, maintained that he would “reduce inflation to single digits.”  The central bank governor he appointed, clearly intends to cut rates as soon as possible, but this will almost certainly force the lira lower in value against major currencies and cause inflation to rise.

 

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