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Turkey’s Central Bank held fire on any further steps to support the lira currency at its September meeting on Sept. 17, keeping all interest rates on hold while also opting against changes to reserve requirements.
The lira - still down more than 10 percent since May - is among the most high-profile victims of a shift in global capital prompted by the Fed’s move towards reining in years of ultra-easy monetary policy.
Turkey is particularly vulnerable because it is heavily dependent on foreign inflows to finance its current account deficit, running at over 7 percent of national output.
But Governor Erdem Başçı has said he would not need to raise central bank rates outright to defend the lira in a policy mix that aims to support a return to the higher growth rates Turkey achieved in 2010-11.
The bank kept its main policy rate, the one-week repo rate, at 4.50 percent, its borrowing rate at 3.50 percent and its overnight lending rate at 7.75 percent, it said in a statement after its monthly monetary policy committee meeting. It also made no immediate changes to how much foreign currency banks have to hold in reserve. A reduction had been expected, which would have supported the lira by boosting the amount of dollars and euros in circulation and which had been forecast by some economists.
The lira, which has taken a hammering this year but recovered around four percent in the past ten days, weakened very slightly in response. The yield on the 10-year bond was unmoved.
“The relative stability of the market allowed them to take a breather,” said Guillaume Salomon, a strategist at Societe Generale.
The bank said it expected core inflation indicators to remain above target for some time and signaled greater transparency in its liquidity management amid fears about the effects of the U.S. Fed’s plans to taper its stimulus programme.
The bank also said this month that it would continue to implement additional monetary tightening “as often as necessary”.“It was deemed important to increase the predictability of Turkish lira liquidity policy for the sake of limiting the domestic impact of global monetary policy uncertainties,” it said in a statement.
Last month the bank said that “it is important to maintain the flexibility of the liquidity management.” “As long as the perception of uncertainty continues in the outside world, the bank would want to increase the predictability of its liquidity policy to support financial stability,” said Sengul Dagdeviren, chief economist at ING.
“But this month they also stated that additional tightening will be implemented as often as needed, so we are seeing a trade off dilemma between flexibility and predictability continuing.”
With an election cycle starting next March, Prime Minister Tayyip Erdoğan’s government is eager to maintain robust economic growth and the Central Bank has been cautious not to jeopardise that by raising rates. Hurriyet Daily
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