Turkey’s central bank left its policy rate unchanged on Tuesday, bucking market expectations of a hike and sending the lira down sharply in the bank’s first policy decision since President Tayyip Erdogan was re-elected with new executive powers.
Concerns about Erdogan’s influence over monetary policy – and about the bank’s ability to rein in inflation – have sparked the sell-off in the lira. Inflation hit its highest in 14 years in June, at 15.39 percent, as the weakening lira drove up food and other prices.
Investor concern about Erdogan’s influence over the central bank deepened after he appointed his son-in-law Berat Albayrak as finance minister. Over the weekend, Albayrak said he would not fight with the markets, comments that had helped boost expectations of a rate hike.
“Utterly mystifying,” said Paul McNamara, emerging markets investment director at GAM Investments in London. “Anything that undermines the lira is likely more dangerous than hikes.”
“While the (central bank) is nominally independent, it’s unlikely that this decision isn’t politically influenced. At the moment, the damage from higher yields and weaker lira is much worse than 125bps in rate hikes would have been.”
The lira TRYTOM=D3, which has lost some 20 percent of its value so far this year, weakened to 4.91 against the dollar following the decision, from 4.7605 directly before.
The bank left its one-week repo rate at 17.75 percent.Fifteen of 16 economists in a Reuters poll had forecast an increase, with an increase of 100-125 basis points considered the most likely option.
Only one economist had forecast that the bank would keep rates on hold.
“It’s a disappointing decision given that inflation accelerated further in June and is likely to rise even more in coming months as a result of the weaker lira,” said Piotr Matys, emerging markets forex strategist at Rabobank.
“This is a surprising decision that re-ignited the selling pressure on the lira.”
The central bank has raised rates by 500 basis points since late April in an effort to put a floor under the currency. Erdogan, who wants to see lower borrowing costs to spur lending and new construction, has described himself as an “enemy of interest rates”.
Investors keep a close eye on the direction of economic policy as Turkey’s widening current account deficit and double- digit inflation have increased concern the economy is overheating and could be headed for a hard landing.