Turkey Keeps Hawkish Tone on Inflation in Holding Rates

(Bloomberg) -- Turkey's central bank kept all its main interest rates unchanged on Wednesday and pledged to keep liquidity tight until it sees indications of a permanent slowdown in inflation.

The bank's monetary policy committee held the late liquidity and one-week repo rates steady at 12.75 percent and 8 percent, in line with the median estimate in a Bloomberg survey. The overnight lending and borrowing rates remained at 9.25 percent and 7.25 percent.

Although consumer prices have cooled in recent months, annual gains are still holding above 10 percent, or twice the bank's official target. Governor Murat Cetinkaya has vowed to keep a tight rein on monetary policy until he's convinced Turkey isn't just seeing a temporary slowdown in inflation due to last year's high readings.

The lira weakened after the decision and was trading 0.3 percent lower at 3.8068 per dollar at 2:27 p.m. in Istanbul.

In a statement on Wednesday, the bank maintained its liquidity stance, but added that some key measures of prices weren't budging.

“Underlying trend indicators display inertia and core inflation remains elevated,” the rates committee said in the statement. “Tight monetary policy stance will be maintained decisively until inflation outlook displays a significant improvement, independent of base effects and temporary factors.”

The increased caution is a sign the bank remains concerned over the outlook for inflation, according to William Jackson, senior economist at Capital Economics in London.

“Barring any fresh falls in the lira, headline inflation should ease a little over the coming months as the impact of previous currency weakness fades,” Jackson said by email. “We expect the central bank's average cost of liquidity provision -- the best measure of overall monetary conditions -- to remain at its current level of 12.75 percent over the course of this year.”

The so-called cost of cash the bank provides to commercial lenders is now two-and-a-half percentage points above the inflation rate. That's the highest level in at least seven years.

--With assistance from Constantine Courcoulas

To contact the reporter on this story: Onur Ant in Ankara at oant@bloomberg.net.

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Mark Williams, Amy Teibel

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