Rate decision a test for Turkey’s central bank

Turkey ETF Plunges After Central Bank Stands Pat on Rates

Equity ETFsTurkey ETF Plunges After Central Bank Stands Pat on Rates By Max Chen

The 64-year-old leader had repeatedly clashed with the central bank over borrowing costs that he's determined to keep as low as possible, though his rhetoric has backfired by triggering policy makers to raise rates to support the lira. This at a time when the world's 17th largest economy struggles with a plunging currency-the lira has fallen 20% against the USA dollar since January.

Since his appointment, Albayrak has sought to reassure markets and present himself as trustworthy on the economy, insisting the central bank's independent status would not be "a subject of speculation".

Turkey's central bank meets today for its monthly monetary policy review-the first since the re-election of President Recep Tayyip Erdogan.

The decision ran counter to what many market participants expected as analysts were calling for a rise of at least a percentage point to combat inflation, which climbed to 15.4% last month, its highest annual rate in 15 years.

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Erdogan has opposed high rates in order to boost growth and argues that cheaper loans lead to slower inflation. The lira has lost more than a fifth of its value against the dollar since the start of the year. A falling currency can become a problem as it makes it harder for Turkish companies to service debt held in foreign currencies and weakens the returns on foreign companies' investments in the country.

The meeting was widely seen by as a test of how the bank would act under the new executive presidential system, which went into effect this month and gave Erdogan sweeping new powers. That expectation firmed on July 23 when newly-appointed finance and treasury minister Berat Albayrak said that Turkey would not fight with the markets but instead would pursue a "win-win" relationship with them.

In a research note released on July 20, Capital Economics concluded that a failure by the central bank to hike policy rates at its upcoming MPC meeting would trigger another TRY sell-off and probably push the regulator into an emergency rate hike anyway.

"This decision essentially confirms the markets' worst fears", said Inan Demir, an economist at Nomura International in London.

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