ISTANBUL: Turkey's central bank left its key interest rates unchanged on Thursday, despite slowing economic growth, as it battles stubbornly high inflation and pressure on the lira in the face of an expected tightening in U.S. monetary policy.
Today's lack of action was expected, although it was the first time since April that rates had been kept on hold. The bank said it would leave policy tight in Turkey until the outlook for inflation improves significantly.
"Elevated food prices continue to delay the improvement in the inflation outlook," the bank said in a statement on its web site. "Meanwhile, declining commodity prices are expected to limit upside risks on inflation."
The bank left its one-week repo rate at 8.25 percent, its overnight lending rate unchanged at 11.25 percent, its primary dealers overnight borrowing rate at 10.75 percent and its overnight borrowing rate at 7.50 percent.
All 14 economists polled by Reuters forecast the central bank would leave its main one-week repo rate at 8.25 percent. Two predicted a 50-basis-point cut and one predicted a 25-basis- point cut in the overnight lending rate.
"The central bank faces a tricky balancing act. Inflation is uncomfortably high and the current-account deficit, though it has narrowed, is still a weak spot," said Neil Schearing, head of emerging markets research at Capital Economics.
He said the economy was struggling and growth will slow from the pace set in the first quarter.
"Turkey still has more vulnerabilities to tightening U.S. policy, especially because of external risks and rapid credit growth. The weakening lira also points in the direction of tighter policy in the future."
Turkish government officials have warned that tensions in Iraq and Syria, as well as Ukraine, combined with slower growth in Europe, could hit the Turkish economy, putting pressure on the central bank to cut rates and support growth.
The country is especially sensitive to changes in global liquidity because of its large current account deficit, which was easier to finance during the years of cheap U.S. funding.
"Today's was a Fed-driven decision by the central bank. It is a reminder - not that one were needed - that Turkey's central bank is swayed by sentiment and sentiment alone," said Nicholas Spiro, head of Spiro Sovereign Strategy.
"If markets let it get away with further rate cuts, it's likely to keep loosening monetary policy, but when sentiment deteriorates, the central bank is likely to be more prudent. It's no coincidence that this is the first time since April that Turkey's central bank has kept all its rates steady."
The ruling AK Party is keen to maintain its strong record on growth before a parliamentary election next June, but it faces a rising number of obstacles, and the economy slowed more than expected in the second quarter.
The central bank last month unexpectedly lowered its overnight lending rate, which was considered more a signal to a government keen for rate cuts that it was supporting the economy.
President Tayyip Erdogan, prime minister until last month, has urged sharper rate cuts to spur growth.
The central bank, whose own forecast for 2014 inflation is 7.6 percent, said this month that the year-end inflation forecasts in its monthly survey had risen to 8.89 percent from 8.70 percent previously.
Inflation reached 9.54 percent in August, double the bank's 5 percent year-end target rate.
Central bank governor Erdem Basci set out his case two weeks ago against the rate cuts championed by some in government, saying they might prompt Turks to hoard dollars and that growth would in any case pick up towards the end of 2014.
Economy Minister Ali Babacan said last week that reducing inflation and the current-account deficit will continue to be priorities for the government.
The lira slipped to 2.25 against the dollar, its weakest in six months, before the rate decision. It stood at 2.2525 at 1130 GMT.
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