Turkish central bank hikes rates to support currency

Marco Green
November 20, 2020

With the stakes so high, market watchers expect rate hikes and an end to credit-driven growth of the country that has prevailed for the last three years.

The lira rose almost 3 percent against the dollar immediately after the decision, before reducing its gains to 1.9 percent, or TL 7.56.

Turkey's central bank last changed its policy rate in September when it increased it to 10.25% from 8.25% due to higher than expected inflation rate.

President Recep Tayyip Erdogan appointed Naci Agbal as the bank's governor earlier this month, likely a effect of the lira's record fall in value.

The lira has lost nearly a quarter of its value this year and has slid by more than half since the start of 2018 when a currency crisis swept through financial markets.

The reshuffle and Erdogan's subsequent promise to give his new economic team a free rein to right the economy sparked a sharp rally on the Turkish market. In addition, Turkey imports more goods and goods than it exports. The massive recent fall in the lira's value could lead to a balance of payment crisis, with Turkey unable to pay its foreign debt. According to the judgment of economists, this contributed to the fact that the current account was in deficit even before the outbreak of the corona pandemic.

Turkey's central bank on Thursday aggressively raised its main interest rate after a major economic team shake-up that included President Recep Tayyip Erdogan's son-in-law giving up his finance ministry brief.

Loss of income due to the slump in the important tourism business is now worsening the situation, which is also characterized by the fact that the central bank had used up its foreign exchange reserves in the vain defense of the Lira exchange rate.

It added that although data for November show an increase in inflation, this is expected to be only temporary with the monetary policy stance.

The new central bank governor Naci Agbal justified the decision after the first meeting he chaired with the fight against inflation.

The central bank's monetary policy committee chose to implement strong monetary tightening in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process, the central bank said in a statement.

This scholar from Ankara's Bilkent University also noted that the decision to increase interest rates would also have a positive effect on Turkey's global monetary credibility. It increased its late liquidity window rate to 14.75 percent to counter persistent double-digit inflation, which stood at 11.89 percent in October.

Thursday's decision was seen by many investors as evidence that Mr Erdogan, a staunch opponent of high interest rates, had mandated the new governor to act - at least in the short term - to stabilize the currency and a much-needed wave of overseas Capital back into the Turkish markets.

'Our aim is to reach single-digit inflation right away by maintaining fiscal discipline (and) implementing structural and micro reforms focused on growth and employment, he said. He also wants to focus on growth, exports and employment. However, he then restricted that again by pointing out that "our investors should not be allowed to be crushed by high interest rates".

Other reports by Click Lancashire

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