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The Central Bank of Turkey stuck firmly to its guns on November 23, leaving benchmark rates on hold despite calls from the markets to deal with the growing current account deficit. Meanwhile, some analysts suggest that the "backdoor" rate rise introduced earlier this month may be starting to work.

There were no surprises following a meeting of Turkey's central bank, with interest rates remaining on hold. The benchmark one-week repo rate remained at a record low of 5.75% and the overnight lending rate at 12.5%.

Turkey has been heavily criticized for refusing to raise its benchmark policy rate, with the lira falling to a record low of 1.90 to the dollar in October. In response the bank effectively raised rates by announcing that it would use either the policy rate or the overnight rate on a daily basis depending on currency movements.

The authorities are evidently happy to leave things as they are for now. "In spite of the likely slowdown in growth, as long as a disorderly balance of payments adjustment remains a threat, we think there is little chance of policy easing over the next six months or so," writes Capital Economics.

"Indeed, if anything we suspect that policy tightening is more likely, which could come about by restricting liquidity even further via the 1-week window in favour of the overnight window, hiking the overnight lending rate or raising reserve requirements."

The analysts also suggest that the recent policy is starting to work, with the lira appearing to have stabilized and foreign net inflows into equities and government debt reaching almost $1.5bn in early November. In September and October, Turkey saw about $4bn in net outflows.

However, opinion is split, with Fitch downgrading Turkey's rating outlook from "positive" to "stable" on November 23. The ratings agency cited the country's massive current account deficit as the main reason for the downgrade.

Fitch analyst Ed Parker wrote that the downgrade "reflects an increase in near-term risks to macroeconomic stability as Turkey faces the challenge of reducing its large current-account deficit and above-target inflation rate." In September Turkey's current account deficit expanded to $6.8bn, up about 80% from $3.9bn a year previously.

Following the downgrade, although Fitch affirmed Turkey's rating just below investment grade at BB+, the lira weakened 1% to 1.8706 to the dollar and the Istanbul Stock Exchange fell 1.9%.

Turkey's economic policies have confused investors for the last few months, and something of a stand off has developed. The backdoor rate rise was accompanied by outcry that Turkey's economic policies are being treated unfairly by rating agencies and foreign media, and it seems unlikely that the authorities will become any less obtuse in the near future.

That said, the main point of policy has been aimed at stabilizing the depreciating lira, and that appears to have been achieved. Concerns over higher year-end inflation and complaints by banks over the increased cost of borrowing are unlikely then to receive a sympathetic response from officials.