Turkish central bank holds rate at 19pc after inflation jump

ISTANBUL: Turkey's central bank held its key interest rate steady at 19% as expected on Thursday and repeated a pledge for tight policy, saying the high level of inflation expectations posed a risk on pricing behaviour after inflation jumped to a two-year high.

In a Reuters poll, all 18 economists forecast the bank would keep its one-week policy rate unchanged on Thursday, while most expected it to start easing in the fourth quarter.

"The policy rate will continue to be determined at a level above inflation to maintain a strong disinflationary effect until strong indicators point to a permanent fall in inflation," the bank said after its monetary policy committee meeting.

Annual inflation climbed to 18.95% in July on the back of rising food and energy prices, sharply narrowing real yields and putting pressure on the central bank to maintain tight policy.

The lira firmed as far as 8.5290 to the dollar after the announcement from 8.5930 beforehand amid relief that the bank did not signal an imminent rate cut. Turkey's dollar-denominated government bonds rallied 0.4-0.5 cents.

The currency has lost some 13% of its value to the dollar so far this year. Its decline, which raises prices due to imports priced in hard currencies, has been sharpened by President Tayyip Erdogan's calls for rate cuts.

The central bank may begin easing towards the end of the year as inflation is expected to remain elevated over the coming months, said Jason Tuvey, senior emerging markets economist at Capital Economics.

"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 (Governor Sahap) Kavcioglu looks to fulfil the president's desire," he said.

The independence of the central bank has been a main concern for investors in recent years, given that Erdogan, a self-described "enemy" of interest rates, has sacked the last three governors partly due to differences in policy.

Last month, the central bank raised its year-end inflation forecast to 14.1%, bringing it closer to but still below market expectations as it predicted inflation would fall significantly in the fourth quarter.