Turkey eyes inflation as bank holds key rate at 19%

ANKARA: Turkey's central bank said Thursday it was keeping a close eye on rising inflation as it left its key interest rate unchanged at 19 percent for the fifth month.

The bank said "high levels of inflation expectations continue to pose risks to the pricing behaviour and inflation outlook" and reaffirmed its promise to keep its policy rate above that of inflation.

Consumer price increases accelerated to a two-year high of 18.95 percent in annual terms last month.

The lira was trading at around 8.54 to the dollar 30 minutes after the rate decision was announced.

The bank's decision came despite nagging pressure from President Recep Tayyip Erdogan to lower borrowing costs as quickly as possible to improve Turkey's growth prospects.

Erdogan reaffirmed his unorthodox belief that high interest rates cause inflation instead of tamping it down last week.

"There will be no high interest rates high interest rates will bring us high inflation," Erdogan said in a television interview.

"The month of August is a breaking point. With August, God willing, we will switch to low inflation."

The Capital Economics consultancy in London said the rate decision probably left Erdogan "disappointed".

"We think that an easing cycle is unlikely to commence until late this year when inflation looks set to fall sharply as the effects of previous falls in the lira start to unwind and (central bank chief Sehap) Kavcioglu looks to fulfil the president's desire," its analyst Jason Tuvey wrote.

But others said the pressure would be on the bank -- which has gone through four governors in two years -- to cut rates at its meeting next month.

"Erdogan said that inflation would fall from August, so I guess that means he will expect a rate cut in September," Timothy Ash of BlueBay Asset Management in London remarked.