Turkey central bank holds rates steady despite Erdogan broadsides

Turkey's central bank on Tuesday held key interest rates steady despite blistering attacks from President Recep Tayyip Erdogan urging a sharp cut ahead of June parliamentary elections.
The bank said in a statement after its latest monetary policy committee meeting that the one-week repurchase rate would be kept at 7.50 percent, the marginal funding rate at 10.75 percent and the borrowing rate at 7.25 percent.
It remains to be seen if this decision will satisfy Erdogan, who was briefed by the nominally independent bank's governor Erdem Basci last week after accusing the monetary policy chief of treason for the failure to cut rates.
Erdogan's bitter attacks on the central bank has severely eroded the value of the Turkish currency lira which hit all time lows against the US dollar in recent weeks.
Erdogan is eyeing strong growth to deliver a victory for his ruling AKP party in the June 7 legislative polls. If it secures a majority, the AKP could then change the constitution to give Erdogan an expanded presidential role.
But tensions have appeared to calm somewhat after Erdogan's two-hour meeting last Wednesday with Basci, who gave the president a presentation on the state of the economy based on 130 slides.
Markets had been awash with rumours that Basci and the government's economic pointman, Deputy Prime Minister Ali Babacan, were about to resign over the issue, a move that risked causing an economic crisis.
Erdogan has since scaled down his attacks on the bank after the two sides agreed in the meeting to "maintain strictly the existing trust and stability" in the Turkish economy.
The central bank's decision to leave interest rates on hold rather than cut again was "clearly a response to the latest sell-off in the lira," which forced Erdogan to tone down his aggressive demands for rate cut, the Capital Economics said in a note to clients.
"If the lira stabilises, we wouldn't be surprised to see Mr Erdogan's rhetoric heat up again," it added.
"Yet, we remain doubtful if this case is sustainable, especially against a backdrop of deteriorating growth outlook," economist Gokce Celik of the Istanbul-based Finansbank said in an emailed note.
The Turkish lira strengthened lightly against the dollar, gaining 0.60 percent to trade at 2.61 lira to the dollar.
The bank said in a statement its current cautious monetary policy, along with prudent fiscal policies were having a "favourable impact on inflation", and suggested its cautious stance should be maintained given the uncertainty in global markets and rising food prices.
The bank said in a statement structural reforms would help potential growth "significantly."