Defying sliding lira, Turkish central bank holds rates

[December 20, 2016]  By Daren Butler

ISTANBUL (Reuters) - Turkey's central bank kept interest rates on hold on Tuesday, defying predictions it would hike, as the sliding lira currency took a back seat to President Tayyip Erdogan's push for cheaper credit.

The currency has lost 17 percent of its value against the dollar this year, hit by investor concerns about a crackdown by authorities after a failed coup in July and by a resurgent dollar following Donald Trump's U.S. presidential election win.

Erdogan wants the central bank to reduce borrowing costs to help spur flagging economic growth. He has described himself as an "enemy" of high interest rates and railed at banks for what he views as overcharging for credit.

But investors want to see more aggressive rate hikes to prop up the lira, which faces further selling if the Federal Reserve continues to raise U.S. interest rates, pulling more money out of emerging markets and into dollar-denominated assets.

"In an environment, where the Fed is tightening and where regional and domestic politics are not in good shape, the decision is negative for (the lira) in the medium term," said Muammer Komurcuoglu, economist at Is Investment.

The bank kept its benchmark one-week repo rate unchanged at 8 percent. Thirteen of 18 economists in a Reuters poll had expected a rise in the repo rate.

"Exchange rate movements due to recently heightened global uncertainty and the increase in oil prices pose upside risks on the inflation outlook," the central bank's monetary policy committee said in a statement.

"The aggregate demand developments restrain these effects."

It said economic activity had shown a partial recovery for the final quarter after a deceleration in the third quarter and the recovery was expected to continue at a moderate pace.

The lira weakened on Monday after the Russian ambassador to Turkey was shot dead as he gave a speech in the capital Ankara but rebounded on Tuesday before the rate decision on relief that Moscow and Ankara had struck a unified tone after the attack.

After rates were left on hold, the lira <TRYTOM=D3> tumbled as far as 3.5440 against the dollar from 3.5095 beforehand.

"This is a central bank that's damned if it does and damned if it doesn’t because of the lack of credibility and ineffectiveness of monetary policy to address the multiple challenges confronting Turkey right now," said Nicholas Spiro, a partner with Lauressa Advisory in London.

The bank kept its overnight lending rate at 8.5 percent. Fifteen of the 18 economists had forecast a hike in the lending rate, which is the upper band of the bank's interest rate corridor.

The bank, which uses multiple interest rates to provide funding to the market, kept the lower band - the overnight borrowing rate - at 7.25 percent.

(Additional reporting by Ece Toksabay; Editing by David Dolan and Catherine Evans)

[© 2016 Thomson Reuters. All rights reserved.]

Copyright 2016 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.