Lira Fired Up as Central Bank Plays It Safe Before Elections

(Bloomberg) -- Turkish lira traders have plenty of risks to navigate over the next few months but the prospect of a central bank misstep before municipal elections in March may no longer be one of them.

By leaving interest rates unchanged on Wednesday and keeping its rhetoric over the dismal inflation outlook hawkish, the central bank is helping dispel speculation it could usher in a new wave of currency depreciation with monetary easing before the vote on March 31.

Lira Fired Up as Central Bank Plays It Safe Before Elections

The lira “seems to be free of the risk of a premature cut ahead of the local elections,” Inan Demir, an economist and Nomura Plc in London, said in a note. Still, it may come under pressure again, “especially if geopolitical tensions re-emerge.”

The prospect of looser policy had weighed on the lira. Until Wednesday’s move to leave the benchmark at 24 percent for a third consecutive meeting, it was off to the worst start among emerging markets this year. While the possibility of further tensions with the U.S. over Syria continues to weigh on sentiment, the currency strengthened after the announcement to lead an advance among peers. The central bank’s next decision is on March 6.

The Turkish currency was trading 0.5 percent weaker at 5.3675 per dollar as of 8:57 a.m. in Istanbul. It gained more than 2 percent against the greenback on Wednesday, trimming its losses for the year to below 1 percent. Nomura sees the currency extending its appreciation 5.15 per dollar.

Lira Fired Up as Central Bank Plays It Safe Before Elections

On Wednesday, the Monetary Policy Committee led by Governor Murat Cetinkaya kept its language largely unchanged from last month’s statement, vowing to deliver “further monetary tightening” if necessary.

“While developments in import prices and domestic demand conditions have led to some improvement in the inflation outlook, risks to price stability continue to prevail,” it said. “Accordingly, the committee has decided to maintain the tight monetary policy stance until the inflation outlook displays a significant improvement.”

Turkey’s economy is sputtering because of the fallout from a currency crash over the summer. But inflation is still running at just above 20 percent from a year earlier, four times the central bank’s target. Policy makers dragged their feet in 2018 and hesitated to raise rates aggressively, acting only after the currency buckled.

Lira Fired Up as Central Bank Plays It Safe Before Elections

“The positive market reaction is the latest evidence that high interest rates are a major source of support for the lira,” said Rabobank strategist Piotr Matys. “While the sharp slowdown in inflation is a major positive signal, the lira’s volatile start to the year requires a cautious approach to monetary policy.”

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