TD: Central bank holds interest rates as lira tumbles
Turkey's central bank held interest rates on Tuesday after a drop in food and energy prices eased inflationary pressures, maintaining a cautious stance with one eye on political tensions that have driven the lira to record lows.
The currency hit a new low of 2.88 against the dollar.
Prime Minister Ahmet DavutoÄŸlu is expected on Tuesday to relinquish the mandate to form the next government after coalition talks failed, raising the prospect of another parliamentary election in the autumn after June's indecisive vote.
Against that background, the bank kept its one-week repo rate at 7.50 percent and the overnight borrowing rate at 7.25 percent. The overnight lending rate remained 10.75 percent and the primary dealers' overnight borrowing rate 10.25 percent.
"Taking into account the uncertainty in domestic and global markets and the volatility in energy and food prices, the committee decided to implement a tighter liquidity policy as long as deemed necessary," the bank said in a statement.
In a Reuters poll of 12 economists, eight had expected the key one-week rate to be left unchanged and four had forecast a 50-100 basis point hike.
Months before the election, President Tayyip ErdoÄŸan had exerted pressure on the central bank to cut rates to boost a flagging economy, but economists say the country needs tighter policy to fight inflation.
Speaking before the central bank decision, Economy Minister Nihat Zeybekçi said that calls for higher interest rates did no good to Turkey and that the recent appreciation of the dollar was "totally speculative".
Government officials have said economic growth is likely to fall far short of Ankara's targets this year.
The lira has plunged more than 18 percent against the dollar this year, making it one of the worst-performing major emerging market currencies.
It is expected to remain under pressure with no sign of the political uncertainty easing in the near term, or an end to a cycle of violence in the country's southeast pitting government forces against the Kurdistan Workers' Party (PKK) terrorist group.
Under the terms of the constitution, ErdoÄŸan could dissolve DavutoÄŸlu's caretaker cabinet and call for the formation of an interim power-sharing government to lead Turkey to a new election within months if no deal is reached by Aug. 23.
Such a temporary arrangement would theoretically hand cabinet positions to four parties with deep ideological divisions, leaving policy-making paralysed and deepening uncertainty.
ErdoÄŸan's ruling Justice and Development Party (AK Party) has cultivated a record of sound economic management since it first came to power in 2002 but lost its ability to govern alone in the June 7 election.
