Turkey Extends Rate Pause as Currency Laggard Stalks Economy

(Bloomberg) -- Turkey’s central bank held rates for a third straight meeting as a weak lira stalks an economy still reeling from a summer currency crash. The lira gained.

The Monetary Policy Committee led by Governor Murat Cetinkaya kept its benchmark at 24 percent on Wednesday, in line with the forecasts of all but two economists surveyed by Bloomberg. The central bank kept its language largely unchanged from last month’s statement, vowing to deliver “further monetary tightening” if necessary.

“While developments in import prices and domestic demand conditions have led to some improvement in the inflation outlook, risks to price stability continue to prevail,” it said. “Accordingly, the committee has decided to maintain the tight monetary policy stance until the inflation outlook displays a significant improvement.”

The lira surged after the decision and was trading 1 percent stronger at 5.3945 per dollar at 2:14 p.m. in Istanbul, the biggest increase among 24 emerging-market currencies tracked by Bloomberg.

“The positive market reaction is the latest evidence that high interest rates are a major source of support for the lira,” Rabobank strategist Piotr Matys said after the announcement. “While the sharp slowdown in inflation is a major positive signal, the lira’s volatile start to the year requires a cautious approach to monetary policy.”

The focus now shifts to the central bank’s next meeting, scheduled just weeks before local elections on March 31, as it waits to relieve the strain on the economy. But despite an economic downturn and a slowdown in inflation, policy makers may be reluctant to rush a rate cut after a new bout of tensions with the U.S. over Syria has once again put the lira under pressure.

The Turkish currency was off to the worst start among its peers in emerging markets this year until Wednesday’s rate decision. It was down as much as 10 percent earlier this year before recouping losses to just around 2 percent.Although inflation has slowed for a second month, it remains just above 20 percent from a year earlier, four times the central bank’s target. The slowdown in inflation might allow policy makers to unwind September’s rate hike if sentiment toward the currency improves, Matys said.

(Updates with central bank comment starting in second paragraph.)

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