ISTANBUL: Turkey's central bank left key interest rates unchanged on Wednesday, holding fire ahead of a June parliamentary election, even as the lira's slide to record lows risks fuelling inflation.
The CBRT did, however, use other policy tools -- hiking what it pays on lira reserves and cutting the cost of borrowing dollars -- in an attempt to shore up the battered currency.
Economists said that such "tinkering" with monetary policy highlighted the difficult position faced by the bank, which has been under heavy pressure from President Tayyip Erdogan to cut rates before the June 7 polls.
"These tweaks make the monetary policy set-up even more complex and are likely to reinforce concerns that the CBRT is unwilling to defend the lira by raising official interest rates due to government pressure," William Jackson of Capital Economics said in a note.
"The country's gaping current account deficit, high inflation and relatively large dollar debts mean monetary conditions will need to remain tight, despite government pressure to revive the economy ahead of June's election."
The bank left the one-week repo rate at 7.50 percent and the overnight borrowing rate at 7.25 percent.
It said it would maintain tight policy until there was a significant improvement in the outlook for inflation.
The overnight lending rate remained at 10.75 percent and the primary dealers' overnight borrowing rate at 10.25 percent.
All 16 economists in a Reuters poll expected the bank to leave rates on hold.
The CRBT made a "measured" cut to its forex depo lending rate, what it charges banks to borrow emergency dollar funds, in addition to lifting what it pays banks on lira reserves.
FINANCIAL STABILITY
Those changes aim to ease some of the pressure on Turkey's currency by encouraging lenders to hold more lira with the central bank, while boosting dollar liquidity.
"A measured cut in the forex deposit lending rates and a measured hike in the partial remuneration rate on Turkish lira required reserves will support financial stability," the bank said in a statement.
Driven in part by the weaker lira, food costs pushed consumer prices sharply higher in March.
The lira, which has slid as much as 14 percent against the dollar this year to a record low of 2.7305 last week, weakened slightly to 2.6975 after the decision.
The currency's chronic weakness has been exacerbated by uncertainty over the election outcome and concerns about political meddling in monetary policy. While President Tayyip Erdogan has halted public criticism of the bank in recent weeks, he had been vociferous about the need for rate cuts.
Erdogan is aiming for a sweeping victory for the AK Party he founded, to allow it to change the constitution and give him broader executive powers.
The lira's slide is also bad news for an economy where dollar debt equals nearly 30 percent of gross domestic product, with much of that held by construction and property firms whose revenues are in lira.
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