ISTANBUL — While markets reacted positively to Turkey’s central bank when it held interest rates steady last week, the decisions that Gov. Sahap Kavcioglu must make in future months will be harder and fraught with more risk for the embattled lira.
Higher inflation has eroded the margin of safety built in to interest rates by Kavcioglu’s predecessor at the bank, just as Turkey’s President Recep Tayyip Erdogan has stepped up his pressure for rate cuts. Kavcioglu — and investors — are acutely aware that Erdogan has sacked three successive governors.
Against that backdrop, the central bank’s resolve was notable. It promised on Thursday to hold the policy rate “at a level above inflation to maintain a strong disinflationary effect until strong indicators point to a permanent fall in inflation,” sending the Turkish lira up more than 1% against the U.S. dollar and adding 2.4% to the domestic stock market.
“Some investors appear to have breathed a sigh of…