Tuesday 24 January 2017 3:17 pm

Turkish lira slumps further as surprise decision to keep interest rates on hold undermines credibility of central bank

Turkey’s central bank shocked investors as it left its main interest rate unchanged in the face of a sliding currency.

The decision raises concerns about political interference in monetary policy by the government ahead of UK Prime Minister Theresa May's visit to Turkey this weekend, following her first meeting with US President Donald Trump.

The Turkish lira fell further against the US dollar as the bank bucked investors’ expectations of a 50 basis point rise in the main repurchase rate.

However, it did tighten its marginal funding rate in an attempt to “contain the deterioration in the inflation outlook,” the bank said in a statement.

The currency has been one of the worst performing in the world in the past six months as fears over instability and high inflation have seen it lose over a third of its value against the dollar from its peak in May.

The bank was under significant pressure to tighten, but Turkish President Recep Tayyip Erdogan is publicly opposed to any rise in interest rates which could slow economic growth. It has previously attempted other unorthodox forms of tightening but has failed to stem losses to the currency.

Erdogan had previously drawn ridicule for urging Turkish citizens to buy lira with their foreign currency at a heavy loss to protect the currency. He also likened the sell-off in lira to a terrorist attack.

Kathleen Brooks, research director at City Index, said: “Today’s decision is likely to be viewed by the market as a politically motivated, rather than an economic one. The finance minister and President Erdogan have both said they don’t want to see higher interest rates due to the damage that it could do to the economy.”

Turkey will vote in April to give President Erdogan further executive powers, in a move foreign observers say will significantly weaken democracy in the country.