Turkey’s central bank defied market expectations on Thursday and maintained its benchmark interest rate, sending the Turkish currency to new record lows against the U.S. dollar and euro.
Following its Monetary Policy Committee (MPC) meeting, the central bank kept its policy rate at 10.25 percent.
“A significant tightening in financial conditions has been achieved, following the monetary policy and liquidity management steps taken to contain inflation expectations and risks to the inflation outlook,” the central bank said in a statement.
As a survey of economists predicted at least a 175 basis-point hike this month and surprised by this decision, the Turkish currency weakened to a new historic low against the dollar at 7.97 Turkish liras and the euro at 9.44.
The greenback was down 1.7 percent and trading at 7.94 at 3:30 p.m. local time in Istanbul. The currency had rallied to a two-week high this week on anticipation of a hike as it did in September.
The currency had weakened in recent weeks. For the first time since a currency crisis in late 2018, the central bank had raised its one-week repo rate, also known as the bank’s policy rate, by 200 basis points on Sept. 22 in an effort to fight inflation and support price stability.
“In an unexpected move, the central bank left the policy rate unchanged at 10.25 percent,” Enver Erkan, an economist with Istanbul-based Tera Securities, said in a note to investors, warning that borrowing costs are still below inflation rates.
“The fact that the October MPC does not move around the policy rate will mean a change in the direction of the simple monetary policy, and it will also mean the separation of policy interest and effective funding rate,” he commented.
Timothy Ash, a London-based economist covering emerging markets, argued that the Turkish central bank took an “unorthodox” decision to tackle a weakening lira and elevated inflation.
“It makes it very hard to invest in Turkey,” he said on his Twitter account.
There is a strong dollarization trend in Turkey where citizens are continuing to buy foreign currency despite the authorities introducing higher charges on deposits and other measures designed to encourage saving in liras.
The lira has lost 25 percent of its value since the start of this year amid new concerns for the vulnerable Turkish economy, which has been affected by the fallout of the COVID-19 pandemic.
Economists attribute the current downturn to a general economic malaise caused by the global health crisis and a sharp drop in Turkey’s foreign currency reserves.
The Moody’s rating agency estimated that the central bank’s attempts to prop up the lira have seen Turkey’s stockpile of dollars and euros shrink to a 20-year low.
Turkish President Recep Tayyip Erdogan has called on the central bank to keep interest rates low, claiming that higher borrowing costs are inflationary.
Last year, the bank cut the policy rate in eight meetings by a total of 1,200 basis points from 24 percent.
Inflation in Turkey stood at 11.8 percent in September, unchanged from the previous month.
Expectations for inflation at the end of the year rose to 11.8 percent in a central bank survey of finance industry professionals this month from 11.5 percent in September. The bank raised its forecast for inflation in 2020 to 8.9 percent in July, from a previous estimate of 7.4 percent.