Central bank ignores Erdogan and raises rates
Lira finally gains some upward mobility following 625bp hike
Ignoring President Tayyip Erdogan’s criticism, Turkey’s central bank has raised the interest rate by 625 basis points in an attempt to put a floor under the tumbling lira. The decision came despite Erdogan repeating his opposition to high interest rates earlier in the day.
“If you say inflation is the cause and interest rates are the result, you don’t know this business,” Erdogan said, adding that he had not once seen the bank correctly forecast inflation.
“We’ve been in this business for 16 years. Will we not learn? You may determine interest rates, but inflation is a result of the wrong steps you (the central bank) have taken. “And who pays the price? The people,” the president, whose AK Party first won power in 2002, told a traders’ confederation.
The president, who has described the lira depreciation as an economic war, said the currency was experiencing “fake volatility” and that Turkey’s recent troubles were the result of manipulation.
“This massive rate hike is going to stabilise the Turkish lira,” said Bernd Berg, a strategist at Woodman Asset Management AG in Zug, Switzerland. “With a central bank that has gained in credibility by showing its independence, Turkish assets are poised to recover in the short-term.”
Turkey’s central bank raised its benchmark rate by 625 basis points in a move that boosted the lira and may ease investor concern about President Tayyip Erdogan’s influence on monetary policy.
The bank raised the oneweek repo rate to 24 per cent, increasing interest rates by 11.25 percentage points since late April, in an attempt to put a floor under the tumbling lira.
It firmed to 6.01 against the dollar after the decision, from more than 6.4176 beforehand. The currency lost 40 per cent of its value against the dollar this year, hit by concerns about Erdogan’s influence on monetary policy and more recently by a diplomatic spat between Turkey and the United States.
According to Phoenix Kalen, director of Emerging Markets Strategy, Societe Generale: “It’s substantially higher than we expected. They have switched back to using the one-week repo rate as the main funding rate. This means they have raised the effective funding rate from 19.25 per cent to 24 per cent, much higher than the 150 basis point move we expected.
“The market is very pleased with this outcome and at the same time quite confused. It almost seems like it’s a game of “good cop, bad cop” being played out between the Turkish authorities: with President Erdogan on one hand still making his dislike of interest rates clear and a sizeable reaction from the central bank in response to the recent inflationary and geopolitical developments.”
The decision came despite Erdogan repeating his opposition to high interest rates, saying high inflation was a result of the central bank’s wrong steps. Erdogan, a self-described “enemy of interest rates”, assumed powers under an executive presidential system and has appointed his son-in-law as finance minister. Berat Albayrak appointment’s boosted expectations that the president will look to exercise greater influence over monetary policy.