June 15, 2017 / 11:11 AM / 2 months ago

UPDATE 2-Turkey's central bank leaves key rates on hold despite high inflation

(Adds comment from statement, economist, lira)

By Daren Butler and David Dolan

ISTANBUL, June 15 (Reuters) - Turkey's central bank kept its main interest rates steady on Thursday, in line with market expectations, as it looks to balance double-digit inflation with President Tayyip Erdogan's calls for cheaper credit.

The central bank kept its closely watched late liquidity window at 12.25 percent and its benchmark repo rate on hold at 8 percent, saying it would stick to a tight policy stance until the inflation outlook significantly improved.

All 16 economists polled by Reuters had predicted the bank would leave those rates unchanged, as well as the overnight lending rate, at 9.25 percent, and the overnight borrowing rate, at 7.25 percent. Those were also unchanged.

The lira strengthened immediately after the central bank's announcement before giving up gains later in the day. By 1413 GMT it was 3.5241 to the dollar, nearly 1 percent weaker on the day.

"The central bank seems to be taking the need to tackle inflation more seriously than it has in the past," said William Jackson, a senior economist with Capital Economics in London, in a note to clients.

"Against this backdrop of strong growth this year and high inflation, the interest rate cuts that some now seem to be expecting this year are unlikely to materialise."

Inflation remained near an 8-1/2-year high last month, hitting 11.72 percent, official data has shown.

Erdogan, who narrowly won sweeping executive powers in an April 16 referendum on changing the constitution, has described himself as an "enemy" of interest rates and repeatedly called on banks to lower lending costs to spur the economy.

While annual inflation has neared 12 percent, the central bank has refrained from lifting its benchmark rate and has instead used the more obscure late liquidity window to tighten. That has boosted a perception that the bank is wary of making outright rate increases due to political pressure.

"Although recent improvements in cost factors and (an) expected partial correction in food prices will contribute to disinflation, current elevated levels of inflation pose risks on the pricing behaviour," the bank said in a statement.

"The central bank will continue to use all available instruments in pursuit of the price stability objective." (Reporting by Daren Butler; Writing by David Dolan; Editing by Toby Chopra and Gareth Jones)

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