Turkey's surprise move to lift interest rate boosts ailing lira

Andrew Cummings
September 26, 2020

Turkey's central bank raised interest rates for the first time since a currency crisis in late 2018, surprising most economists after a series of backdoor measures fell short of stabilizing the lira.

Economists said the one-week repo rate increase from 8.25 to 10.25 percent also helped the bank reclaim some independence in the face of President Recep Tayyip Erdogan's firm opposition to higher rates. According to analysts from Rabobank, the efforts from the central bank to stabilise the currency via higher interest rates should be accompanied by the Erdogan administration accelerating the pace of structural reforms.

The Turkish national currency, losing over 20 percent of its value against the dollar this year as the COVID-19 pandemic has deepened Turkey's already existing vulnerabilities.

But news of the rate hike saw the lira strengthen to 7.5572 on Thursday before giving back some of those gains.

In a declaration, the bank's financial policy committee stated a rate increase was required to include inflation, which stood at 11.7 percent in July- more than double the bank's 5 percent target.

"The committee assesses that maintaining a sustained disinflation process is a key factor for achieving lower sovereign risk, lower long-term interest rates and stronger economic recovery", it stated.

In the previous three consecutive meetings, the bank kept the rate constant at 8.25%, following a gradual cut of 375 basis points from 12% over the preceding months.

He once called high rates "the mother and father of all evil".

"Massive surprise, and positive", said BlueBay Asset Management analyst Timothy Ash.

Economists said the central bank will have to do even more in the future to save the lira and support its claim of political independence.

It "suggests the Turkish central bank listened to the market and decided they had to move to avoid a disorderly devaluation and potential balance of payments crisis", he said. "They are not out of the woods yet, but they have given themselves a fighting chance".

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