(Bloomberg) -- The Turkish central bank shifted to more hawkish guidance after keeping interest rates on hold for the first time since May, as it moves forward under a new governor who took over earlier this month.

The Monetary Policy Committee indicated it will be less tolerant of risks to prices while leaving the one-week repo rate unchanged at 45% on Thursday. It will tighten policy “in case a significant and persistent deterioration in inflation outlook is anticipated,” the MPC said in a statement accompanying its decision.

Governor Fatih Karahan brought a new tone to his first meeting at the helm, days after replacing Hafize Gaye Erkan after her abrupt departure. While reiterating concern over risks from a sharp wage raise last month, policymakers made clear rates will remain higher for longer and endorsed the lira’s real appreciation as a factor that contributes to disinflation.

“The Committee assesses that the current level of the policy rate will be maintained until there is a significant and sustained decline in the underlying trend of monthly inflation and until inflation expectations converge to the projected forecast range,” the central bank said.

Turkish stocks and bond yields reversed gains and dropped after the decision, while the lira traded little changed. The yield on the government’s 10-year lira securities fell as much as 30 basis points to 26.45%. The Borsa Istanbul Banks Index, which tracks the shares of Turkey’s listed lenders, slipped as much as 1.1%.

What Bloomberg Economics Says...

“Turkey’s central bank will likely balance the first rate pause in nine months by furthering the use of alternative tools to keep financial conditions tight. Our base case sees rates on hold through the third quarter, which contrasts with the hawkish tilt in the February meeting statement. Additional price pressures from election-related fiscal policies are a risk that could warrant further hikes after the March ballot.”

— Selva Bahar Baziki, economist. Click here to read more. 

A former economist at the Federal Reserve Bank of New York and Amazon.com Inc., Karahan was a deputy governor for much of the tightening cycle that lifted rates by 36.5 percentage points with eight straight moves. 

Read more: Turkey Names Ex-NY Fed Economist as New Central Bank Chief

The new governor inherits an economy where domestic demand is still feeding into inflationary pressures, keeping price growth on track to peak above 70% in a few months. The central bank expects inflation to end 2024 at 36%, a level Deputy Governor Cevdet Akcay called an “ambitious but attainable target.” 

The projected path of inflation has become officials’ preferred measure for gauging the tightness of policy, even as rates remain deeply negative when adjusted for current prices.

By breaking off its cycle of rate hikes, the central bank is counting on the momentum of disinflation it tried to set in motion under Erkan. 

Karahan’s arrival at the MPC last July, along with the appointment of two other new members, led to a much faster pace of monetary tightening in the months that followed, as part of a shift away from the era of cheap money and unconventional policies.

Looser fiscal policy ahead of local elections in March presents another threat, with monthly inflation already rising the most since August last month on the back of wage and tax raises.

Earlier this month, the central bank called the impact of a sharp pay hike in January as the biggest upside risk to consumer prices. Sticky inflation in the services industry, including rental costs, is another worry.

Erik Meyersson, chief emerging-market strategist at SEB AB, said he anticipates Turkish rates will remain unchanged through the first half of this year.

“Going forward we see the Turkish central bank doing its utmost to try to convince markets that it isn’t going to cut prematurely,” Meyersson said in a note. “As such, the MPC is likely to keep a relatively hawkish guidance but provide no further conventional policy tightening.”

--With assistance from Joel Rinneby and Tugce Ozsoy.

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