UPDATE 1-Turkey’s central bank cites ‘disinflation’ as it holds rates

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(Adds statement details, lira)

By Ezgi Erkoyun and Daren Butler

ISTANBUL, June 12 (Reuters) – Turkey’s central bank on Wednesday left its key interest rate unchanged at 24% as expected and said it will keep its policy stance tight to “reinforce the disinflation process,” a somewhat more upbeat assessment than its past statement.

“Developments in domestic demand conditions and the tight monetary policy support disinflation,” the central bank said in a statement after its monetary policy committee (MPC) meeting.

It will maintain this stance, it added, “in order to contain the risks to the pricing behaviour and to reinforce the disinflation process.”

In the statement after its previous MPC meeting in April, the central bank cited only “some improvement in inflation indicators” and said its stance would be maintained until the inflation outlook “displays significant improvement.”

Annual inflation has eased from a 15-year peak of 25.24% in October, to 18.71% in May.

The central bank last hiked the repo rate in September to support the lira in the face of a currency crisis which tipped the economy into recession. The economy contracted 2.6% year-on-year in the first quarter.

On Wednesday the bank held its one-week repo rate at 24%, having raised it by 11.25 percentage points last year. In a Reuters poll, 14 economists had said they expected the rate to be kept steady while two predicted a cut.

The lira firmed slightly to 5.8100 against the dollar after the central bank announcement, from 5.8155. The currency has partially rebounded from levels above 6 against the dollar this month as concerns about U.S.-Turkey ties eased somewhat.

The statements suggests the central bank is edging toward a rate cut later this year, as expected.

At its April 25 meeting, the bank dropped a previous reference to possible further tightening if needed to address inflation, a dovish shift which at the time hit the lira.

Last year the lira weakened nearly 30% against the dollar over worries about diplomatic tensions with the United States and the central bank’s independence, with President Tayyip Erdogan pressing for lower borrowing costs to boost growth.

The currency has weakened another 9% this year on renewed U.S. strains and political uncertainty generated by a re-run on June 23 of a mayoral election in Istanbul, after Erdogan’s AK Party narrowly lost the initial vote. (Reporting by Ezgi Erkoyun and Ali Kucukgocmen; Writing by Daren Butler; Editing by Jonathan Spicer)

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