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(Bloomberg) — Turkey’s central bank held its benchmark interest rate steady amid rising inflation expectations caused by the war in the Middle East.
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The Monetary Policy Committee, led by Governor Fatih Karahan, left the one-week repo rate unchanged at 37% on Wednesday. The result was in line with expectations of 18 out of the 24 analysts surveyed by Bloomberg.
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“While indicators point to a slowdown in economic activity, potential secondary effects of recent developments on the inflation outlook will be of importance,” the central bank said in a statement, in reference to the Iran war.
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The bank “remains highly attentive to upside risks on inflation,” it added.
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Language about inflation in the statement was strengthened, according to QNB Bank Chief Economist Erkin Isik. “This suggests that short-term interest rates will continue to be kept at the 40% level for an extended period by maintaining tight liquidity conditions for the lira.”
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Turkish government bonds fell, with the yield on two and 10-year bonds rising 21 basis points and 39 basis points, respectively. The Borsa Istanbul banking index reversed earlier gains to drop 0.3% as of 2:20 p.m. in Istanbul.
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The central bank also signaled that the underlying inflation trend will likely increase in April.
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Market participants’ year-end inflation expectations rose from 25.4% in March to 27.5% in April due to uncertainty surrounding global energy prices.
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The war initially led to a rapid decline in central bank reserves, but the monetary authority took advantage of a ceasefire to offset some of the losses. This prevented the lira’s depreciation from derailing Turkey’s disinflation program.
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To offset the impact of the war and reinforce reserves to defend the lira, the central bank delivered a veiled rate hike in March by switching the funding it provides to lenders to the costlier overnight-lending rate of 40%. That rate was left unchanged on Wednesday.
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Last week Treasury and Finance Minister Mehmet Simsek and Governor Karahan told investors on the sidelines of the International Monetary Fund’s Spring Meetings that the fallout from the Iran war is likely to weigh on Turkish growth and increase price pressures in the short term.
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—With assistance from Tugce Ozsoy and Inci Ozbek.
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(Updates with details from statement, comments, starting from third paragraph.)
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English (US)