ISTANBUL, NEWSBISNIS.COM – Turkey raises interest rates to stabilise lira ahead of polls, Turkey’s central bank surprised markets on Thursday with a higher than expected interest rate increase that will ease concerns about political interference in monetary policy before crucial elections.
Turkey raises interest rates to stabilise lira ahead of polls: The lira rallied sharply after the central bank raised its benchmark repo rate by 125 basis points to 17.75 per cent. The currency gained 2 per cent against the dollar after the increase. Paul Greer, a portfolio manager at Fidelity’s emerging market debt fund, described the decision as a “bold and unexpected move” like copied from ft.com
“Turkey still has many challenges and is in need of deep structural reform on several fronts,” he said. “However, today’s move will go a long way to restoring investor confidence in Turkey’s ability to stay ahead of the curve.”
Turkish officials will hope the rate rise is enough to stabilise the currency as president Recep Tayyip Erdogan bids to extend his 15-year reign over the country at the June 24 elections. Turkey has been grappling with double-digit inflation and a wide current account deficit.
The stronger dollar, shifting sentiment towards emerging markets and domestic politics have added to the pressure on the lira, which lost about a fifth of its value against the greenback between January and the end of May.
Investors have been clamouring for higher rates to help curb annual consumer inflation of 12.15 per cent and to stem the currency’s slide. But some doubted the central bank’s freedom to act after a series of tirades by Mr Erdogan against high interest rates.
The lira went into freefall last month as investors worried about inflationary government spending pledges ahead of the polls, as well as a promise by Mr Erdogan that he would take greater control of economic management after the parliamentary and presidential elections.
The central bank raised its late liquidity window rate by 300bp after an emergency meeting on May 23, a move that investors welcomed but warned had come too late. Since then, the monetary authorities have been striving to regain their credibility. Last week, the central bank announced the unwinding of a complex system of multiple interest rates.
Murat Cetinkaya, the governor, travelled to London in a bid to calm investors’ nerves. Recommended Analysis World Inflation poses challenge to Erdogan as election looms Analysts said Thursday’s rate rise, which brings the total value of rate increases since late April to 500bp, was an important step.
“We have to congratulate the central bank for today’s decision for several reasons,” said Alvaro Ortiz Vidal-Abarca, chief economist for Turkey at the Spanish bank BBVA. “For the first time it decided to go ahead of the curve, surprising most of the markets. It’s a big step forward in the anti-inflation strategy. And it will help to restore credibility.”
Analysts say Turkey still sorely needs a period of readjustment after last year’s 7.4 per cent gross domestic product growth sparked fears that the economy was overheating. Jason Tuvey, at Capital Economics, said: “The key now is whether more orthodox policymaking lasts beyond this month’s election.”
Moody’s offered a reminder of the challenging outlook for the economy on Thursday by downgrading 17 Turkish banks and two other financial institutions. The rating agency cited “erosion” in investor confidence “primarily reflecting mounting uncertainty regarding the future direction of macroeconomic policy” as a reason for its decision.