Turkey’s central bank raised its benchmark rate by a hefty 625 basis points on Thursday, the biggest such increase in President Tayyip Erdogan’s 15-year rule, boosting the lira and possibly easing investor concern over his influence on monetary policy.
The bank’s Monetary Policy Committee raised the one-week repo rate to 24 percent, meaning it has now increased interest rates by 11.25 percentage points since late April in an attempt to put a floor under the tumbling currency.
Its decision came despite Erdogan repeating his opposition to high interest rates earlier in the day, saying high inflation was a result of the central bank’s wrong steps.
All 11 economists in a Reuters poll had forecast the bank would tighten, with the predictions ranging between 225-725 basis points as it balances concerns over the lira’s weakness with worries about a sharp economic slowdown.
Turkey’s currency crisis has been driven by concerns about Erdogan’s influence on monetary policy, but also more recently by the country’s diplomatic row with the United States.
Erdogan, a self-described “enemy of interest rates”, picked his son-in-law, Berat Albayrak, as finance minister in July. This boosted investors’ fears that the president – who wants to see lower borrowing costs to spur credit growth and new construction – sought greater influence over monetary policy.”It is pleasing to see common sense prevail,” said Aberdeen Standard Investments Head of Emerging Market Debt, Brett Diment, of the rate rise.
“Hiking Thursday does get Turkey on the slow road to recovering some monetary policy credibility, and that is critical.”
In August, annual consumer price inflation hit 17.9 percent, its highest level since late 2003, prompting the central bank to say it would adjust its monetary stance at the September meeting in the face of “significant risks” to price stability.
The central bank said in its statement that there was still an upside risk to Turkey’s inflation outlook from what it called a deterioration in pricing behaviour, despite weaker domestic demand conditions.”Accordingly, the Committee has decided to implement a strong monetary tightening to support price stability,” it said.
The lira rallied 3 percent to 6.15 against the dollar, having traded at 6.4176 beforehand. It has still lost 38 percent of its value against the U.S. currency this year.The main share index rose 2.1 percent, with the banking index up 4.8 percent. Dollar-denominated bonds issued by the Turkish government rose across the curve.
The Central bank said it was returning to funding via one-week repos from Friday, having funded the market at an overnight lending rate of 19.25 percent for the last month.
Key rates are now at their highest level since 2004, around a year after Erdogan first came to power.
Guillaume Tresca, senior emerging market strategist at Credit Agricole said the economy needed to slow down because it was overheating and that an interest rate rise was needed to cap lira depreciation.