Despite political pressure for lower rates, Turkey’s central bank on September 14 did as analysts expected it to do by keeping its key interest rates on hold.

Though President Recep Tayyip Erdogan continues to demand that the banks switch to lending more at lower rates to stimulate the economy - the president has several times described himself as an “enemy” of interest rates - the national lender has a fresh upswing in consumer prices to contend with. Inflation returned to double-digits in August.

The central bank kept its one-week repo at 8% and its overnight lending and borrowing rates on hold at 9.25% and 7.25%, respectively. It also decided to keep the late liquidity window-lending rate unchanged at 12.25%.

“Current elevated levels of inflation and developments in core inflation indicators pose risks to pricing behaviour. Accordingly, the Committee decided to maintain the tight stance of monetary policy,” the central bank said in a statement released after the monetary policy committee meeting on September 14.

It added that the tight stance on monetary policy would be maintained until the inflation outlook displayed a significant improvement.

“Inflation expectations, pricing behaviour and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered,” the regulator said.

In the statement, the bank also stated that the recovery in economic activity had gained strength.

Turkey’s economy officially grew by 5.1% y/y in the second quarter of this year thanks to government stimulus measures including a weighty credit guarantee fund and tax cuts brought in for certain durables. However, Germany's Commerzbank has this week caused something of a storm by arguing that it is difficult to believe the official growth figures.

Most analysts believe economic activity will lose pace as the government-introduced stimulus measures expire.

Finance Minister Naci Agbal said on September 14 that the tax cuts would not be extended after they expire this month.

"We expect inflation to peak around +11.5% yoy in October and start falling in December. We think inflation will fall only gradually and remain above +8%yoy in 2018. As a result, we think the central bank will maintain the late liquidity rate at its current level throughout 2018, while possibly loosening liquidity slightly in Q1 through changing its funding mix,” Goldman Sachs said in a note on the bank's rate decision on September 14.