March 6, 2019 / 11:27 AM / 3 months ago

UPDATE 2-Turkish cenbank keeps rates unchanged, says will keep tight policy

(Adds details, background)

By Ezgi Erkoyun and Daren Butler

ISTANBUL, March 6 (Reuters) - Turkey’s central bank left its benchmark interest rate unchanged on Wednesday as expected and said it will tighten monetary policy further if needed, soothing investor worries that it could loosen policy after inflation fell from a 15-year peak.

The one-week repo rate was held at 24 percent, having been raised 11.25 percentage points last year. In a Reuters poll, all 17 economists had said they expected the rate to be kept steady.

“The Committee has decided to maintain the tight monetary policy stance until the inflation outlook displays a significant improvement,” it said in a statement.

“If needed, further monetary tightening will be delivered.”

Amid investor concerns that the central bank would lower rates earlier than expected, it said last month that it would maintain a tight stance until it sees a “convincing improvement” in inflation.

The statement eased some worries that the central bank would cut rates earlier than the June meeting of the monetary policy committee, when most analysts forecast it will start easing.

The lira briefly firmed to 5.3655 against the dollar following the decision, from 5.3795 beforehand. It stood at 5.3984 at 1200 GMT.

Capital Economics senior emerging markets economist Jason Tuvey said he expects the central bank to hold off on a rate cut until June. “By that point, inflation should be falling a lot quicker and the economy will still be struggling quite badly at that point too,” he said.

“So we think they’ll step up and support them.”

The median estimate in a Reuters poll showed that Turkey’s economy contracted 2.7 percent in the fourth quarter of 2018. Analysts also expect it to contract in the first two quarters of 2019 before returning to growth.

Inflation dropped below 20 percent in February, down from a 15-year peak of 25.24 percent in October. The central bank last hiked the repo rate in September to support the ailing Turkish currency.

SLOWDOWN

Wednesday’s monetary policy committee statement had only minor changes from the previous statement in January.

“External demand maintains its relative strength while economic activity displays a slow pace, partly due to tight financial conditions,” it said, adding ‘relative’ to the strength of external demand and changing ‘slowdown’ in economic activity to ‘slow pace’.

Tuvey said neither of the changes pointed towards a significant change in the central bank’s position.

“They talked about external demand in the last press release and I wouldn’t read too much into the tweak about economic activity,” he said.

The lira shed around 30 percent against the dollar last year over concerns about a diplomatic rift with the United States and the central bank’s independence given pressure from President Tayyip Erdogan to cut borrowing costs to boost growth.

The median estimate in a Reuters polls showed last Friday that economists expect the central bank to cut by a total 500 basis points by year-end.

Erdogan, a self-described enemy of interest rates, has in the past regularly criticised central bank policy, but he has remained quiet on the issue in recent months. (Additional reporting by Ali Kucukgocmen and Ezgi Erkoyun Editing by Dominic Evans and Alexandra Hudson)

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