Turkish lira gains as central bank keeps interest rates on hold

Turkey’s lira strengthened against the dollar after the central bank kept its benchmark interest rate on hold at a meeting on Thursday.

The lira rose by 0.6 percent to 6.928 per dollar, extending gains since early November to about 20 percent. The currency was trading near its highest levels since early August.

The central bank vowed to keep monetary policy tight this year in a statement accompanying the rates decision.

“The tight monetary policy stance will be maintained decisively, taking into account the end-2021 forecast target, for an extended period until strong indicators point to a permanent fall in inflation and price stability,” the bank said.

Central bank governor Naci Ağbal is winning plaudits among foreign investors, who had fled the country last year due to lira weakness and lax monetary policy. Ağbal has hiked borrowing costs for banks from 10.25 percent since his arrival on Nov. 7, the day after the lira hit a record low of 8.58 per dollar.

naci ağbal
Naci Ağbal, Turkey's third central bank governor in two years

The central bank said it recognised that inflation expectations for the end of the year, which stood at 11.2 percent in a February survey of finance industry professionals, needed to be reined to achieve its year-end goal of 9.4 percent. Additional monetary tightening would be delivered if needed, it said.

Annual consumer price inflation in Turkey accelerated to 15 percent last month from 14.6 percent in December. It is expected to edge higher in the coming months.

Tim Ash, senior emerging markets strategist at BlueBay Asset Management, said inflation would probably accelerate until April. The central bank has admitted as much and should “get ahead of the curve” to ensure inflation expectations are kept in check, he said.

“The longer they hold as inflation rises the more Ağbal uses up his well of policy credibility,” Ash said in e-mailed comments to clients following the rates decision.

Turkish President Recep Tayyip Erdoğan, who appointed Ağbal, opposes higher interest rates saying they are inflationary. Analysts say his views, which contradict traditional economic thinking, may be preventing Ağbal from taking a more hawkish stance.

The central bank may elect to keep interest rates on hold throughout the year, rather than lower them in the second half as many economists predict, London-based research and consultancy firm Capital Economics said in a report on Wednesday.

The lira may gain to 6.25 per dollar by December, Capital Economics said, citing renewed investor confidence in the country and lower political risks.

U.S. bank Citigroup cashed in profits on a lira-euro trade earlier this week saying that it expected renewed pressure on emerging market currencies.