Turkey cenbank holds rates at 19%, eyes wobbly lira

By Ece Toksabay and Jonathan Spicer

ISTANBUL, June 17 (Reuters) - Turkey's central bank held its key interest rate at 19% as expected on Thursday and suggested it was inching closer to a cut expected later this year, even while it nodded to renewed pressure on the lira currency.

The bank said recent import-price pressure plays a role in posing risks to inflation expectations, and it repeated a pledge to keep rates above inflation, which is expected to remain around 17% for much of the year.

The central bank last changed its one-week policy rate TRINT=ECI in March when former governor Naci Agbal raised it to head off rising prices. A Reuters poll shows analysts expect easing to begin in the fourth quarter when inflation is predicted to decline.

The lira has shed 2.5% this week after the U.S. Federal Reserve adopted a more hawkish tone, and after the first meeting between President Tayyip Erdogan and U.S. counterpart Joe Biden yielded no breakthroughs on key disputes.

The weakness in the lira, which touched an all-time low earlier this month, raises inflation via Turkey's heavy imports.

"In addition to the recent import-price-based cost factors, demand conditions, supply constraints in some sectors, and high levels of inflation expectations continue to pose risks to the pricing behaviour and inflation outlook," the bank's policy committee said in a statement after its monthly meeting.

But earlier rate hikes "continue to restrain credit and demand", it said. "The policy rate will continue to be determined at a level above inflation", in line with the bank's forecast for prices to continue easing in the months ahead.


Central Bank Governor Sahap Kavcioglu, who Erdogan named to replace Agbal in a shock to markets in March, has said inflation should fall decisively around September. The central bank year-end inflation forecast stands at 12.2%.

Erdogan has repeatedly called for monetary stimulus and this month pointed to July or August for possible rate cuts, prompting analysts to warn that premature easing could hurt the currency and economy, which has heavy foreign debt.

"Policymakers are for now standing up to political pressure to lower interest rates," said William Jackson, chief emerging markets economist at Capital Economics.

The lira, among the worst performers in emerging markets this year, weakened slightly to 8.644 to the dollar at 1148 GMT. It briefly slipped to a record 8.88 earlier this month.

The 13% depreciation this year accelerated when Erdogan ousted Agbal, a well-respected hawk, prompting an exodus of foreign investment and further eroding the credibility of a bank that has seen four chiefs in two years.

The World Bank, Fitch Ratings and Goldman Sachs are among those to have said prompt rate cuts and an earlier-than-expected Fed tightening are the main risks for Turkey.

On Wednesday, the U.S. central bank signalled rate rises could come in 2023 as the economy emerges from the pandemic.

Turkey's dollar bonds barely budged after the rate decision, with longer-dated issues still down around 0.7 cents in the dollar, also reflecting wider pressure in emerging markets following the Fed decision. US900123CG37=TE US900123BJ84=TE

Tight policy to continue? Link

Additional reporting by Ece Toksabay; Editing by Catherine

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