Turkey's central bank headquarters in Ankara, Turkey.

JAKARTA (TheInsiderStories) – The Central Bank of Turkey left its one-week repo auction rate unchanged at 24 percent on April 25th, 2019. Policymakers said that they will continue to use all available instruments in pursuit of the price stability objective.

The Committee noted an improvement in inflation indicators, still, factors including higher import and food prices and the elevated course of inflation expectations point to continued risks to price stability.

The country’ annual inflation rate rose to 19.71 percent in March from a six-month low of 19.67 percent in February, way above the central bank’ midpoint target of 5 percent.

“The Central Bank will continue to use all available instruments in pursuit of the price stability objective. Factors affecting inflation will be closely monitored and monetary stance will be determined to keep inflation in line with the targeted path,” the bank official statement said yesterday (04/26).

Recently released data showed that rebalancing trend in the economy has continued. External demand maintains its relative strength while economic activity displays a slow pace, partly due to tight financial conditions. The current account balance is expected to maintain its improving trend.

Developments in domestic demand conditions have led to some improvement in inflation indicators. Yet, higher food and import prices and the elevated course of inflation expectations point to continued risks to price stability.

“Accordingly, the Committee has decided to maintain the tight monetary policy stance until inflation outlook displays a significant improvement,” the central bank said.

Turkey’ fixed income market stuttered after the bank’s announcement, with the price of the government’s dollar-denominated debt taking a hit. Meanwhile, the cost of hedging against a Turkish debt default using five-year credit default swaps crept up to the highest level since last year’s lira crisis.

The lira dropped as much as 1.5 percent against the US dollar, sending it to the weakest level since October. It has tumbled 7 percent this month.

The monetary policy decision, along with fresh data that show the country’ foreign currency coffers had dropped $1.8 billion last week, deepened worries about the country’s deteriorating financial defenses.

President Recep Tayyip Erdogan is a staunch opponent of high-interest rates and his consistent criticism has caused angst among analysts and investors.

The central bank targets price growth at an annual rate of 5 percent. Separate data released on Thursday showed net foreign currency reserves fell to $26.9 billion in the week to April 19, down from $28.7 billion in the previous week. The drop leaves the closely scrutinized metric at the lowest level since a decline in the week of March 22 that dented the lira.

Following a market wobble in March the central bank had begun padding out its reserves by engaging in billions of dollars in short-term swaps transactions — a tactic that analysts and investors say is highly unusual.

Stripping out the stock of swaps from last week’s data brings the reserves total to $14.9 billion, down from $16 billion the previous week and $35 billion during the final week in February, on the same adjusted basis.

The central bank said this use of swaps “may impact reserve figures”, adding that the dollars it borrows are placed on the assets side of its balance sheet with the corresponding liability marked as an “off-balance sheet item”. This was in line with international norms, it said.

The reserves figures are closely watched as they are a proxy for Turkey’s ability to defend itself in the case of a fresh lira crisis. Turkey had $177 billion in external short-term debt as of February, official data show.

A Turkey analyst at a major international financial institution said the declining currency reserves suggest the country’s external vulnerability is at levels haven’t seen before.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com