UPDATE 2-Turkish central bank sticks to high interest rates after inflation rise

(Adds analysts, background)

ISTANBUL, May 6 (Reuters) – Turkey’s central bank held its key interest rate steady at 19% as expected on Thursday and repeated a pledge to keep it above inflation, which the bank expects to cool after having risen beyond 17% as the lira depreciated.

The lira has shed 13% since mid-March when President Tayyip Erdogan shocked markets by appointing as bank governor Sahap Kavcioglu, who had been an outspoken critic of Turkey’s tight monetary policy.

But the currency edged up slightly after the central bank said it will maintain its current stance until inflation falls according to a forecast published last week, in which it predicted price pressure would ease beginning this month.

The central bank also said that past rate hikes – including as recently as in March – have begun to cool demand in the economy. It also dropped a reference made in April’s policy statement to “maintain the tight monetary stance”.

With the rate left unchanged for a second straight month, Oyak Securities said the new guidance “signals that the tight monetary policy will not be (abandoned) as soon as June.”

Foreign investors have fled Turkish assets and dumped the lira since March 20 when President Tayyip Erdogan sacked the former central bank chief, respected policy hawk Naci Agbal, driving up trade-related inflation for import-dependent Turkey.

Last week, the central bank raised its year-end inflation expectations to 12.2% from 9.4%, still below market expectations. It expects inflation to dip from April, when it climbed to 17.14%, its highest level in nearly two years.

“Taking into account the high levels of inflation and inflation expectations, the current monetary policy stance will be maintained until the significant fall in the (bank’s) forecast path is achieved,” the monetary policy committee said.

It added that the tight stance has had a “decelerating impact” on credit and domestic demand.

In a Reuters poll, all 18 economists forecast the bank would keep its one-week policy rate unchanged, before easing likely in the third quarter.

Many analysts expect inflation will keep rising this month and possibly in June. In April, the sagging lira and pricy commodity imports pushed producer price inflation up above 35%, which could keep driving up consumer inflation in the coming months.

Erdogan has repeatedly called for monetary stimulus to boost economic growth. He has fired three bank chiefs in two years, eroding monetary credibility.

The central bank “maintained a hawkish tone (and) policymakers left the door open for the start of an easing cycle over the coming months,” said Jason Tuvey, senior EM analyst at Capital Economics.

“As inflation starts to drop back … we suspect that the central bank will begin cutting rates to appease President Erdogan.”

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