By Jared Malsin and Caitlin Ostroff 

ISTANBUL -- Turkey's central bank held interest rates steady on Thursday in the first major decision since President Recep Tayyip Erdogan replaced the institution's chief last month in a move that sparked a selloff in Turkish assets.

The bank kept its key one-week repo rate at 19%, a move that is unlikely to woo foreign investors back. The ousting of Gov. Naci Agbal was the latest in a series of abrupt economic decisions by Mr. Erdogan, and has heightened concern over the nation's economic stability and intensified the political challenges for Turkey's leader.

Mr. Agbal's removal caused investors to pull nearly $2 billion from the country in the following weeks. During his four months in office, Mr. Agbal had inspired investors' confidence by raising interest rates in an effort to control inflation, but he ran afoul of Mr. Erdogan, who favors low rates to encourage economic growth.

The new governor, Sahap Kavcioglu, is a former member of parliament from Mr. Erdogan's Justice and Development party who has also voiced support for low interest rates.

"The CBRT will continue to use decisively all available instruments in pursuit of the primary objective of price stability," the central bank's Monetary Policy Committee said in a statement.

A line saying that "additional monetary tightening will be delivered if needed" that was present in the March statement under Mr. Agbal was absent from Thursday's announcement. The lira fell 0.6% against the dollar after the decision.

Economists say the rate decision won't be enough to control Turkey's double-digit inflation, which climbed to 16.19% in March in its sixth consecutive monthly rise.

"Given the upwards risks on the inflationary prospects, I don't think a steady policy rate will be able to address these pressures," said Selva Demiralp, a professor of economics at Istanbul's Koç University and a former economist at the Federal Reserve Board.

Turkey's economy has struggled in recent years as the country has reeled from domestic political turmoil and instability stemming from wars in neighboring Iraq and Syria. Mr. Erdogan survived a failed military coup attempt in 2016 and Turkey has also absorbed millions of refugees from across the region.

Mr. Erdogan's own economic decisions have added to the instability. In 2018 he appointed his own son-in-law, Berat Albayrak, to lead the Ministry of Finance, raising concerns about the narrowing circle of advisers around the president.

Turkey has also been hit hard by the coronavirus pandemic, which devastated tourism and slowed international trade. The country has reported record numbers of new coronavirus cases in recent weeks, prompting the government to impose this week a monthlong partial lockdown.

Turkey's struggling economy has added to domestic political pressures on Mr. Erdogan, who has sidelined a series of former leaders of his own party and faces an array of potential challengers in future elections.

The economic turbulence has resulted in a steep drop in the value of the Turkish lira in recent years, which has made it harder for ordinary people to buy basic necessities. The currency notched repeated record lows against the dollar in 2020, only stabilizing when Mr. Agbal raised rates. Since his dismissal, the lira has lost 10% of its value.

Turkey also faces the challenge of rebuilding foreign-currency reserves after using them to defend the lira in 2020 and stem its fall. This pool of cash and easily sold assets is an essential buffer to prevent a balance-of-payments crisis that could leave the country unable to pay for essential imports or make payments on its external debt.

The firing of Mr. Agbal also further shook the Turkish public's confidence in their government's handling of the economy, opinion polls show.

In a survey conducted by MetroPOLL, a leading Turkish polling outfit, 59% of people said their confidence in the government's economic policies fell as a result of Mr. Agbal's firing. Nearly 40% of supporters of Mr. Erdogan's own party said their confidence fell as a result of the decision.

"Confidence in institutions is very much shaken at the moment," said Ozer Sencar, MetroPOLL's director, in an interview.

Mr. Agbal's firing also raised concerns that Turkey's president would aim to increase credit to support rapid economic growth as a way to shore up political support. In the past, credit expansion by state-owned banks has widened the gap between Turkey's imports and exports, increasing demand for goods denominated in foreign currencies that have boosted inflation and weakened the lira.

"One of the reasons we think why the changes are occurring is Erdogan wants to go for early elections and there will be increasing nationalistic rhetoric and also potentially higher spending [to boost growth]," said Yerlan Syzdykov, head of emerging markets at Amundi Asset Management. "All of this bodes ill for the risk taking for us."

Write to Jared Malsin at jared.malsin@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com

(END) Dow Jones Newswires

April 15, 2021 08:06 ET (12:06 GMT)

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