CBT unexpectedly holds interest rate, hints at credible approach

Yesterday, the Turkish lira rallied after the Central Bank of Turkey unexpectedly kept the interest rates unchanged during its MPC meeting. The CBT kept the key interest rate on hold at 7.5 percent. During all of its six meetings earlier, the central bank had been issuing token cuts to its over-night lending rate that has been a symbol to the government, noted Commerzbank in a research report.

The economic advisors of the President had stated before the central bank’s decision that there is less pressure on the CBT to lower rates. This was definitely an attempt to ease the lira that had been under pressure recently.

This might mark a turning point. Governor Murat Cetinkaya highlighted that the movements of the Turkish lira had restricted the scope for Turkey’s inflation to rebound. There is possibility that economic policymakers of the country, including the central bank, have decided to take the example of prudent central banks that been able to break inflation-exchange rate spirals, according to Commerzbank.

There is a major difference between skipping one rate cut and true willingness to raise rates if required. The recent history of the Central Bank of Turkey signifies that the new MPC might need to show credibility in a longer period of time, added Commerzbank.