Turkey has announced its biggest interest rate rise in more than two years as it signalled a change of direction after a drastic shake-up in the country’s economic management.
In the first rate-setting meeting chaired by new central bank governor Naci Agbal, the bank moved to tame inflation and bolster the Turkish lira by lifting its benchmark one-week repo rate by 4.75 percentage points to 15 per cent.
The lira jumped almost 3 per cent against the dollar immediately after the decision, before trimming its gains to 1.9 per cent, or TL7.56. Turkey’s currency is still down 22 per cent since the end of last year.
The lira suffered months of record lows before the shock resignation of President Recep Tayyip Erdogan’s son-in-law Berat Albayrak as finance minister 10 days ago. Investors’ concerns about Turkey’s economic policies and the economic fallout from the coronavirus pandemic have combined to pile pressure on the currency.
Thursday’s decision will be seen by many investors as evidence that Mr Erdogan, a staunch opponent of high interest rates, has given the incoming central bank governor a mandate to act — at least in the short term — to stabilise the currency and could tempt a much-needed wave of foreign capital back into Turkish markets.
Ehsan Khoman, head of Mideast and north Africa research and strategy at Japanese bank MUFG, said the bank had needed to “wow markets, restore credibility and predictability” and had done “exactly that”.
The increase, which was in line with the expectations of economists surveyed by Bloomberg, takes the one-week repo rate to slightly higher than the average interest rate that the central bank had been charging to supply funding to the Turkish financial system in recent weeks.
It had been using a complicated system of multiple rates that appeared to aim to tighten monetary conditions without incurring the wrath of the president, and had in effect brought the cost of funding provided by the bank to 14.8 per cent by Wednesday.
An announcement by the bank that it would provide all funding through the one-week repo rate means that, following Thursday’s decision, the actual increase in the cost of funding will only rise by 0.2 percentage points.
But the move was welcomed by investors and analysts as a sign that the bank was returning to a more conventional approach to monetary policy.
The increase “might not seem like much in light of what was at stake”, said Jason Tuvey, a senior emerging markets economist at Capital Economics, the consultancy. “But investors were always more focused on whether the decision would mark a shift towards orthodox policymaking — that is, a transparent monetary policy framework based on one main policy rate.”
Investors also welcomed the bank’s commitment to tackle inflation — which stood at more than twice the official 5 per cent target last month — and rebuild the country’s dwindling foreign currency reserves.
It also stated its intention to reverse a trend that has seen Turkish businesses and households increasingly choose to hold their savings in dollars and euros rather than lira, which has put further pressure on the currency.
With additional reporting by Adam Samson in London
Source: Economy - ft.com
