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Turkish central bank keeps interest rates steady despite weakening currency

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Turkey’s central bank held its benchmark interest rate steady as expected on Thursday despite the lira hitting record lows this week, and it paved the way to more back-door measures that have tightened credit and slowed the currency’s decline, Reuters reported.

The bank said exchange rate moves have delayed an expected drop in inflation, as it kept its one-week repo rate unchanged at 8.25 percent. It has held policy steady since June following an aggressive year-long easing cycle.

Analysts said a formal tightening of monetary policy may have only been delayed given looming concerns over depleted central bank reserves, costly state interventions in the currency market and Turks’ surging demand for hard currencies.

The central bank said upward pressure on inflation will eventually “phase out” along with the impact of the novel coronavirus. Yet it acknowledged that “exchange rate and credit developments restrain the demand-side disinflationary effects,” raising inflation trends.

It will continue with “liquidity measures,” the bank added.

The policy rate is sharply below annual inflation at 11.76 percent. But economists said the back-door measures and political pressure would likely keep the bank on hold, and only five out of 17 in a Reuters poll had expected a hike.

The lira slid 0.9 percent to 7.347 versus the dollar in response and is down 19 percent this year. The currency hovered around 6.85 for two months before a burst of selling in late July raised some expectations for a policy pivot.

The central bank has used other tools to raise borrowing costs that have lifted the weighted average cost of funding to 9.37 percent from a low of 7.34 percent on July 16.

The latest such move came on Thursday when the bank separately raised forex and lira required reserve ratios for commercial lenders.

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