Turkey makes first rate hike in bid to boost lira

Istanbul / AFP

The Turkish central bank on Thursday announced it was hiking its main interest rate by 50 basis points, in a bid to counter a drastic fall in the value of the lira.
The monetary policy committee of the bank said the one-week repurchasing rate was being lifted to 8.0 percent from 7.5 percent, the first rate hike by the bank since January 2014. The Turkish lira has lost over 10 percent in value against the dollar over the last month amid doubts over Turkey’s flagging growth prospects and fears the drive by President Recep Tayyip Erdogan for a presidential system will risk more instability.
The bank is nominally independent but its decision follows a number of high-level political meetings on the economy including talks at Erdogan’s palace late on Wednesday.
The bank said exchange rate movements due to heightened global uncertainty and volatility pose “upside risks” to the inflation outlook. “The Committee decided to implement monetary tightening to contain adverse impact of these developments on expectations and the pricing behaviour,” it said explaining the decision.
Inflation in October was 7.16 percent, still well off the bank’s target of five percent.
Erdogan has repeatedly pressed for lower rates to boost growth in Turkey and spooked markets on Wednesday with a new diatribe.
“They say, ‘the central bank is independent, it’s this, it’s that’. Okay let it be independent, but I am a politician,” he said.
“I cannot allow the people’s rights, laws to be wasted by the path to high interest rates, this is what I want to explain,” he added.
Erdogan added that in almost 14 years of leading Turkey achieving lower interest rates was one of few areas “where I have fallen short on making progress”.
‘Motivated by lira fall’
The lira had been under pressure in the hours before the decision, which markets saw as a litmus test of the central bank’s ability to resist political pressure for an expansionary monetary policy. The lira reversed earlier losses to immediately recover on the rate hike news, gaining 0.74 percent in value against the dollar on the day.
“The decision to begin the tightening cycle was clearly motivated by the fall in the lira,” said William Jackson, senior emerging markets economist at Capital Economics in London. He said the losses of the lira this month were the worst among any emerging market currency and even more severe than those of the Mexican peso which was battered in the wake of Donald Trump’s election in the US.
Pointing to Turkey’s high current account deficit and vulnerability to Fed tightening, he added: “We see the lira remaining under pressure next year too.”
Ozgur Altug at BGC Partners in Istanbul said that the bank “provided the message that it can hike its interest rates when it is needed”, adding that the move looked like a “one-off hike rather than a tightening cycle.” In other rate moves, the overnight borrowing rate remained intact at 7.25 percent but the overnight marginal funding rate was raised to 8.5 percent from 8.25 percent, the bank said on its website.