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Turkey surprises markets with unchanged rates


map_of_turkeyTurkey’s central bank on Tuesday decided to leave its main interest rates unchanged, surprising markets which had awaited a hike in the wake of the Federal Reserve’s historic raise last week.

The bank left its main one-week repurchase rate unchanged at 7.5 percent while for overnight lending the marginal funding rate was left at 10.75 percent and the borrowing rate at 7.25 percent.

Market consensus had been for a hike in the headline repo rate of at least 25-50 basis points.

The Turkish lira immediately lost 1.15 percent in value against the dollar, with markets surprised that the rates had not been lifted in the wake of the Fed’s decision on December 16 to lift rates for the first time in nearly a decade.

It later rallied but only slightly to trade at 2.94 lira to the dollar, a loss in value of 0.9 percent.

“The decision was rather unexpected, as almost everybody in the market was expecting the central bank to change its interest rates,” said Ozgur Altug, economist at BGC partners in Istanbul.

He said in a note to clients that after the Fed’s rate hike “there is no room for easing… (and) in fact, a tighter monetary policy might be required” in Turkey.

The Turkish lira has lost over 25 percent in value against the US dollar since the start of the year with markets unnerved by political uncertainty, the situation in neighbouring Syria and the military’s ongoing battle with Kurdish militants.

It has rallied slightly over the last three months, gaining around 3.0 percent against the dollar. But the central bank remains concerned about persistently high inflation, which came in at 8.1 percent in November from the same period the year earlier.

“Future monetary policy decisions will be conditional on the inflation outlook,” the central bank said in a statement accompanying its decision.

The bank also promised “simplification steps” for its monetary policy which has been criticised by markets for having overly-complicated multiple interest rates.

The nominally independent central bank and its chairman Erdem Basci had been vilified by President Recep Tayyip Erdogan earlier this year for not slashing rates to boost growth ahead of elections.

William Jackson, emerging markets economist at Capital Economics in London, said the surprise decision to keep rates unchanged would again raise fears that the bank was susceptible to government pressure.

“The fact that (the bank) held fire today when an interest rate increase was so widely expected will raise fresh concerns that the central bank is bowing to political pressure to keep rates low,” he said, adding this could put further pressure on the lira.

He said the bank could finally move rates at its upcoming January 19 meeting.

“Any further delays would rattle investors further, resulting in an even weaker lira and, possibly, larger rate hikes further down the line,” said Jackson in a note to clients.

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