While raising interest rates could help stem the lira’s slide, the central bank is under pressure from the government to cut rates in order to stimulate Turkey’s flagging economy-although the bank is supposedly fully independent from political influence.
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“Political uncertainty also must have been an important, as any decision made now could be affected by actions from the caretaker government that will be in place shortly”, said Attila Yesilada, an economist with Global Source Partners in Istanbul.
Turkey’s lira plummeted by 1% to a fresh low of 2.8943 per dollar and to an new all-time low of 3.2042 per euro after the central bank held rates steady and unveiled a vaguely stated plan to shift to an orthodox monetary stance.
Against that background, the bank kept its one-week repo rate at 7.50 percent and the overnight borrowing rate at 7.25 percent.
The bank’s decision had been forecast by the largest number of analysts before the decision.
On July 23, the bank had held key interest rates at the current levels. The governor said policy makers planned to simplify the central bank’s monetary policy framework to prepare for the U.S. Federal Reserve’s expected rate increases later this year, which is likely to drain cash from emerging markets such as Turkey, which rely heavily on foreign funding. “Still, there’s a nod towards tightening, including paring back liquidity”.
The lira is expected to remain under pressure. Since the deadline for the formation of government ends by this week, Turkey now faces rising risk of a snap election.
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Erdogan’s ruling AK Party has cultivated a record of sound economic management since it first came to power in 2002, but lost its ability to govern alone in the June 7 election.
