March 7, 2018 / 11:18 AM / 16 days ago

UPDATE 2-Turkey's central bank holds rates, weighing inflation, politics

(Adds central bank, analyst comment)

By Daren Butler and Behiye Selin Taner

ISTANBUL, March 7 (Reuters) - Turkey’s central bank kept interest rates steady on Wednesday and said it would keep policy tight until price pressures eased, signalling its intention to rein in inflation against a complex political backdrop.

Year-on-year inflation has cooled from the 14-year peak of 12.98 percent it reached in November. But, at 10.26 percent in February, it remains one the main imbalances in the economy and well above the bank’s target of 5 percent.

Despite this, President Tayyip Erdogan has repeatedly called for cheaper credit to boost the economy, leading to concerns among investors that the nominally independent central bank is susceptible to political influence.

The bank last hiked rates in December, its first tightening in eight months.

Its monetary policy committee said in a statement that inflation and inflation expectations “continue to pose risks on pricing behaviour”, with underlying indicators displaying “inertia”.

It also said recent data indicated economic activity remained robust and domestic demand was continuing to expand.

For a second straight meeting, the bank left all four of it policy-setting rates unchanged, as predicted by all 15 economists polled by Reuters.

Nomura International economist Inan Demir said overheating pressures and the susceptibility of the lira to global and Turkey-specific shocks meant “the risks are skewed towards higher rates.”

“However, we do not expect the Bank to act unless the currency comes under severe pressure,” he said in a note to clients.

The lira was little changed at 3.8010 from 3.7987 immediately before the central bank’s announcement.

The bank kept its late liquidity window, the highest of the instruments it uses to set policy, at 12.75 percent. The overnight lending rate stayed at 9.25 percent and the overnight borrowing rate at 7.25 percent.

Turkey’s economy has rebounded strongly from a downturn that followed an attempted coup in 2016, helped by a series of government stimulus measures. It grew by 11.1 percent year-on-year in the third quarter, its fastest expansion in six years.

Annual GDP growth is expected to be over 7 percent in 2017. (Writing by Ezgi Erkoyun; Editing by David Dolan and John Stonestreet)

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