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Turkey keeps main interest rate at 17%

2021-01-21

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SULAIMANI — Turkey's central bank on Thursday (January 21) kept its main interest rate steady at 17 percent after two consecutive hikes aimed at slowing down inflation and supporting the slumping lira currency.

But the bank also promised "to maintain decisively the tight monetary policy stance for an extended period" of time.

The decision was in line with the expectations as economists appear so far satisfied by the moves taken by the new central bank governor, Naci Agbal.

Facing rising inflation and a falling lira, President Recep Tayyip Erdogan replaced the  governor and finance minister last year with market-friendly officials.

Erdogan had put pressure on the bank's managers to keep interest rates down, subscribing to the unorthodox belief that higher rates cause inflation instead of tamping it down.

But Thursday's decision is likely to raise questions about future monetary policy and the influence Erdogan appears to still wield over the nominally independent bank.

"A mistake in my mind by Agbal, the first he has made to date," BlueBay Asset Management economist Timothy Ash said. 

"This was an opportunity to get ahead of the curve and remember inflation increased in December and is expected to increase in the first quarter."

Consumer prices rose faster than expected last month at 14.6 percent year-on-year. 

Capital Economics senior emerging markets economist Jason Tuvey said inflation concerns "appear to have been put to one side amid signs that Turkey's second virus wave and tighter monetary conditions caused the economic recovery to falter at the end of 2020."

Agbal raised the rate by a combined 675 basis points in his first central bank two meetings which saw the Turkish lira rally as markets sighed in relief.

But Erdogan reaffirmed his distaste for high rates in a speech to a group of Turkish businessmen on Friday, causing the lira to pare back some of its recent gains.

"We'll achieve nothing with high interest rates," Erdogan said. "Whether they listen or not, I'm against them. I will continue my struggle against them until the end."

Economists such as Ash said another rate hike on Thursday would have signalled Agbal's independence to foreign investors, who have been leaving the Turkish market in the past year.

(NRT Digital Media/AFP)