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Turkey's cenbank holds policy rate at 8.5% ahead of election runoff

Kitco News

ANKARA, May 25 (Reuters) - Turkey's central bank kept its policy rate at 8.5% on Thursday as expected, holding steady for a third straight month, despite a market rout after the first round of elections which indicated President Tayyip Erdogan was poised to win in the runoff.

After Erdogan's solid lead in the May 14 vote became clear, the lira has tumbled to record lows, its sovereign dollar bonds and equities have plunged, while the cost of insuring exposure to Turkish debt has spiked.

But the central bank did not mention any of these moves on Thursday, and instead said the underlying trend of inflation continued to improve.

"It has become even more important to keep financial conditions supportive to preserve the growth momentum in industrial production and the positive trend in employment," the bank said after its monthly policy meeting.

Erdogan came out comfortably ahead of opposition leader Kemal Kilicdaroglu in the first round of the presidential election but fell just short of the more than 50% support needed to avoid this Sunday's runoff.

Economists expect annual inflation, which declined to 43.7% in April, from a peak of 85.5% last year, to rise again in the coming months.

But they expected the central bank to keep rates on hold this month despite the market rout and the expected rise in inflation, according to the median estimate of 12 economists who participated in the Reuters poll.

The lira stood unchanged at 19.9235 against the dollar after the central bank decision, near a record low of 19.93 which it touched earlier on Thursday.

The bank last cut its main interest rate (TRINT=ECI) by 50 basis points in February to provide stimulus after earthquakes which killed more than 50,000 people in Turkey and caused extensive destruction across ten provinces.

Last year the central bank cut its key rate by 500 basis points in an unorthodox easing cycle designed to counter an economic slowdown, before keeping it steady at 9% in December and January.

The unorthodox cuts, which were part of Erdogan's plan, led to a currency crisis and sent inflation soaring.

The presidential election could change the path of monetary policy, making it difficult for many economists to forecast a year-end policy rate in the Reuters poll.

There is disagreement and uncertainty within Erdogan's government over whether to stick with what some call an unsustainable economic programme or to abandon it, insiders say.

With foreign reserves tumbling, some analysts say Turkey could face another economic crash as soon as this year that sends inflation soaring again and strains its balance of payments - unless the government changes course.

Kilicdaroglu's opposition alliance pledges to reverse Erdogan's programme with aggressive rate hikes and a return to free-market principles, a prospect that cheered international investors ahead of the elections.

The central bank's policy of stabilising the lira, meanwhile, sent its net foreign reserves into negative territory for the first time since 2002, while the bank has also sold $9 billion in gold since March to meet pre-election demand.

Reporting by Ali Kucukgocmen and Ece Toksabay; Editing by Daren Butler
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