Turkish cenbank halts rate cuts after currency crisis

ISTANBUL, Jan 20 (Reuters) – Turkey’s central bank held its policy rate steady at 14% on Thursday as expected, halting an unorthodox and aggressive easing cycle that had sparked a currency crisis and sent inflation soaring to a 19-year high late last year.

The bank said it would monitor the impact of its previous policy decisions and expects the “disinflation process to start”, bringing stability. It also said it began a “comprehensive review of the policy framework” in order to prioritise the currency and help meet its inflation mandate.

Under pressure from President Tayyip Erdogan, the central bank began easing in September, cutting its policy rate by 500 basis points to 14%. It signalled last month that it would pause the easing cycle to monitor its effects in the first quarter.

The cuts have left real yields in deeply negative territory as inflation accelerated to 36%, and sparked a crisis that saw the lira lose 44% of its value against the U.S. dollar last year. The bank targets 5% inflation.

The currency firmed slightly and was at 13.33 versus the dollar at 1131 GMT following the rate decision.

Jason Tuvey, senior emerging markets economist at Capital Economics, said inflation is likely to rise over the next few months and remain around 40-45% for most of the year.

“If the central bank isn’t hiking interest rates now, there is little reason at this stage to think that it will do so in the coming months,” Tuvey said.

“We suspect that the next move in rates is more likely to be down than up as inflation should, barring another collapse in the lira, start to drop back towards the end of the year.”

“PRIORITISING LIRA”

Erdogan has rapidly overhauled the bank’s leadership with like-minded officials in recent years, hammering its credibility.

The rate cuts were part of the president’s unorthodox new economic plan that prioritises low interest rates and aims to boost exports, credit and employment.

The full-blown currency crisis was halted last month thanks partly to costly state interventions in the currency market as well as a scheme to protect lira deposits against forex depreciation.

With the volatility in the exchange rate largely settled this month, authorities have called on Turks to convert their forex savings to lira under the new government scheme.

The central bank said on Thursday it would review its policy framework “with the aim of prioritizing Turkish lira in all policy tools.”

The deposits under the scheme have so far attracted 163 billion lira ($12.2 billion), Erdogan said on Wednesday. But Reuters has reported that most of that amount comes from existing lira accounts rather than dollars or euros.

Turks snatched up record amounts of forex last month as a hedge against inflation and lira depreciation, sending locals’ forex holdings to a record high more than $239 billion. They had dipped to $234 billion last month.

State banks have set employee performance targets as they urge clients to convert foreign currencies into lira under the scheme, Reuters also reported this week. read more

($1 = 13.3160 liras)

Reporting by Ali Kucukgocmen and Ezgi Erkoyun; Editing by Dominic Evans and Jonathan Spicer

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