The Turkish central bank left interest rates unchanged at the Monetary Policy Committee (MPC) meeting held on January 19, despite analysts' warning that it was time to tighten policy. It kept its main policy rate (one-week repo) at 7.5% and maintained its overnight borrowing rate and lending rates at 7.25% and 10.75%, respectively.
"The Turkish central bank’s decision to keep its key interest rates on hold today, despite pressure on the lira and the deteriorating inflation outlook, adds to the impression that monetary policy moves are being swayed by government influence and will further damage the central bank’s credibility," Capital Economics said in a note. "Predicting interest rate moves in this environment is difficult, but we remain of the view that a sharp rise in inflation over the coming months will, ultimately, force the MPC to tighten monetary conditions."
Last month, the bank had said that it could start to "simplify" its policy if volatility in global financial market disappeared. Volatility, on the contrary, has increased in markets since its December meeting.
The committee also assessed the heightened global volatility since the beginning of the year, the bank noted in the statement released after the MPC meeting on Tuesday. But the bank did not give any hints about its plans for the simplification of its policy.
Energy price developments affect inflation favourably, while other cost factors limit the improvement in the core indicators, the bank noted. The lira depreciated more than 20% against the dollar last year and the local currency lost about 4% of its value over the past month.
Deputy PM Mehmet Simsek told Reuters on Monday in London that he saw no reason for any significant drop in the Turkish lira, even though emerging markets face another year of painful adjustment,
Consumer prices rose 8.81% year-on-year in December, well above the central bank's 5% target, and its revised forecast of 7.9% for end-2015. The sharp depreciation of the lira and an annual rise of 10.87% in food prices were the main factors behind the disappointing inflation figure.
The central bank statement also said: “Considering the wage developments and the impact of the uncertainty in global markets on inflation expectations and pricing behaviour and taking into account the volatility in energy and unprocessed food prices, the tight liquidity stance will be maintained as long as deemed necessary.”
The government increased the minimum wage by 30% to TRY 1,300 (€393) as of January 1 to boost domestic demand. The impact of this wage hike on inflation is expected to be between 1.1-2.2%, according to Simsek.
The government also raised taxes on alcohol products by between 12% and 15% for 2016. The minimum fixed tax rate on cigarettes was increased by 5% and the energy market regulator EPDK raised electricity prices by 6% for the first quarter.
The central bank calculates that the recent hikes in administered prices will add 0.7 percentage points to inflation.
The lira was up 0.07%, trading at 3,0355 per dollar, and the main stock index was up 0.91% at 14:40 local time after the bank announced its rate decision.