Turkey’s central bank has sharply increased its benchmark lending rate as it looks to stem a heavy decline this year in the lira.
The one-week repo rate was increased to 24 per cent from 17.75 per cent. Economists polled by Thomson Reuters expected an increase to 22 per cent.
Turkey’s lira jumped sharply on the news, leaving it up as much as 5.3 per cent on the US dollar from Wednesday’s closing level. Stocks traded in Istanbul also rallied, with the benchmark BIST 100 index up 1.1 per cent and the banks sector rallying 4.2 per cent.
Turkey has struggled with soaring inflation that reached almost 18 per cent in August. The lira, battered by a row between Turkey's government and Donald Trump as well as concerns about the health of the Turkish economy, has lost roughly 38 per cent of its value since the start of the year.
The central bank said on Thursday that “recent developments regarding the inflation outlook” pointed to “significant risks to price stability.” It said that it would “continue to use all available instruments in pursuit of the price stability objective” and that a tight stance would be maintained until inflation showed “signification improvement.”
Policymakers' decision to increase rates came just hours after Turkey's president Recep Tayyip Erdogan decried high interest rates as a "tool of exploitation". In a speech, he reiterated his view, which runs against that of most economists, that high rates stoke high inflation.
Credibility
Turkey's rate rise puts the country "on the slow road to recovering some monetary policy credibility, and that is critical", said Aberdeen Standard Investments' head of emerging market debt Brett Diment.
He added: “If they hadn’t hiked today then the real risk was that the lira would sell-off sharply again and the country would swiftly head towards a balance of payments and even banking crisis.”
Alvaro Ortiz Vidal-Abarca, chief economist for Turkey at the Spanish bank BBVA, described the decision as “very welcome”. He said: “The [central bank]has delivered bold action again, eliminating doubts about independence.” – Copyright The Financial Times Limited 2018
