April 24, 2014 / 12:07 PM / 5 years ago

UPDATE 2-Turkey central bank ignores political pressure for rate cuts in view of high inflation

* Cbank vows to keep policy tight

* Analysts still expect rate cut in months ahead

* Cbank cuts liquidity lending rate to 13.5 pct

* PM Erdogan has called for rate cuts (Adds closing prices)

By Seda Sezer and Daren Butler

ISTANBUL, April 24 (Reuters) - Turkey’s central bank kept its main interest rates on hold on Thursday, ignoring political pressure for cuts to the extent of saying it will keep monetary policy tight until the inflation outlook improves significantly.

The bank kept its overnight lending rate at 12 percent, its one-week repo rate at 10 percent, and its overnight borrowing rate at 8 percent, as predicted by all but one economist in a Reuters poll.

“Today’s CBT statement sounds like that of a truly independent central bank that is providing forward guidance on less need for additional tightening (with which we agree), while at the same time highlighting that a move away from its ‘tight’ stance will come only when there is a significant improvement in the inflation outlook,” said Simon Quijano-Evans, head of emerging markets research at Commerzbank.

The bank’s stance lifted the lira, which was trading at 2.1362 against the dollar by 1422 GMT, firming from 2.14 just before the rate decision. The currency remains susceptible to political risks in the run-up to a presidential election in August.

Analysts still expect rate cuts in the months ahead, forecasting inflation will start to fall from mid-year. And the bank did cut its late liquidity lending rate to 13.5 percent from 15 percent on Thursday, saying a recent decline in uncertainties and a slight improvement in risk premium indicators reduced the need for any more tightening in liquidity.

“We do see the possibility of policy rate cuts again in the coming months, and today’s ‘technical’ cut of the late liquidity lending rate from 15 percent to 13.5 percent should be seen as a first step in this direction,” Quijano-Evans said.

Prime Minister Tayyip Erdogan, who is expected to run in the presidential election, has urged the bank to cut rates and has argued that his ruling party’s strong showing in March local elections had reduced political uncertainty.

His comments have revived concern about the independence of the central bank.

Turkey’s solid economic growth in the past decade was underpinned by stability during most of Erdogan’s rule, which began in 2002.

But growth has slowed sharply, inflation is now above target and consumer confidence has hit a four-year low.

Business leaders and economists expect inflation - which stood at 8.39 percent in March - to stand at 8.12 percent at the end of the year, still well above the bank’s 6.6 percent forecast and its 5 percent medium-term target, the central bank’s monthly survey released on April 18 showed.

“Inflation expectations and pricing behaviour will be closely monitored and the tight monetary policy stance will be maintained until there is a significant improvement in the inflation outlook,” the central bank said in a statement.


Graphic on interest rates: link.reuters.com/jez79t


The bank raised interest rates by a hefty 500 basis points at an emergency meeting on Jan. 28 after the lira hit a record low of 2.39 to the dollar. The bank defended that decision in its statement on Tuesday.

“The strong and frontloaded monetary tightening delivered at the January interim meeting has contained the adverse impact of upside risks on medium-term inflation expectations,” it said.

Central bank governor Erdem Basci has hinted at the possibility of eventually cutting rates.

The bank pushed through what was effectively a rate cut by the back door earlier this month, lowering the average cost of funding through its repo auctions. The average cost of borrowing fell to as low as 10 percent, but the bank tightened liquidity again last week, pushing overnight rates higher.

For months the bank been struggling to defend the lira by burning through its currency reserves and trying to squeeze up borrowing costs on the margins without resorting to outright rate hikes.

The Istanbul stock market closed down 1.06 percent at 73,210.59 points on Thursday, underperforming the wider emerging markets index, which was down 0.03 percent.

Turkish banking stocks dragged down Istanbul’s benchmark index after the central bank did not announce any moves to pay interest on banks’ reserve requirements, as some analysts expected, to support the banking sector.

The 10-year benchmark bond yield traded at 10 percent, down from 10.16 percent at Tuesday’s close. The two-year benchmark bond yield fell to 9.73 percent from 9.84 at Tuesday’s close. (Additional reporting by Ece Toksabay; Editing by Daren Butler/Hugh Lawson/Susan Fenton)

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