Turkey’s central bank lifts rates sharply
Turkey’s central bank has increased interest rates by much more than markets expected in the wake of a battering inflicted on the lira, more than doubling the weekly repo rate from 4.5 to 10 per cent and increasing the top rate from 7.75 to 12 per cent.
The move comes despite a prolonged campaign by Recep Tayyip Erdogan, prime minister, against what he termed an interest rate lobby, but follows a slide in the lira to a series of all-time lows in recent days.
In the past year, the currency had lost about 30 per cent against the dollar. In response to Tuesday night’s move, the lira immediately recovered lost ground, rising to TL2.19 to the dollar. On Monday, before the bank had announced it was holding its emergency meeting, the currency had fallen to TL2.39.
The central bank decision may come as welcome news to the corporates holding more than $160bn in foreign currency-denominated debt, which had seen the cost of servicing rise in tandem with the plunge in the currency, but the sharp increase in rates is likely to slow the economy, which was already growing below Turkey’s 5 per cent long-term trend.
“Recent domestic and external developments are having an adverse impact on risk perceptions, leading to a significant depreciation in the Turkish lira and a pronounced increase in the risk premium,” the bank said in a statement, apparently referring to both the political turmoil within Turkey over a corruption scandal that has pitted the govenrnment against Islamic former allies, and moves by the US Federal Reserve to rein in monetary stimulus.
It added that its new “tight monetary policy stance will be sustained until there is a significant improvement in the inflation outlook”, highlighting its goal of bringing inflation down to 5 per cent by mid 2015. Inflation is currently above 7 per cent and had been expected to deteriorate further, in part because of the currency’s slide.
The central bank had previously been criticised by analysts and investors for not focusing sufficiently on inflation and for having a multiplicity of targets, but its latest statement appears to put efforts control inflation back at the heart of its endeavours.
Mr Erdogan had sounded a defiant note earlier on Tuesday, vowing that the economy would continue to grow despite attempts at “sabotage” and that the beneficiary would be the population as a whole, not the elites.
Speaking ahead of the extraordinary meeting of the central bank’s Monetary Policy Committee, Mr Erdogan said the economy’s recent troubles were the result of a conspiracy.
“I want those who can’t stand our success inside the country and abroad to know that over the last 11 years the economy as been based on solid ground,” he said, accusing unnamed foes of seeking to damage his government by weakening the economy, partly by using the international media. “The Turkish economy will not be driven down by sabotage.”
In later comments on Tuesday evening, Mr Erdogan appeared to try to distance himself from any decision to raise interest rates. “The central bank is an independent institution . . . of course I am against increasing interest rates”, he said. “If something happens in the future they will be responsible”.
However, he added he hoped the bank’s steps “would be positive” and that there would be a “new era” for the Turkish lira after its recent slump.
Despite Mr Erdogan’s remarks, the independence of the central bank has been the object of increasing scrutiny by investors and analysts.
Until this week the central bank has shied away from increasing benchmark rates, despite a 30 per cent slide in the value of the lira against the dollar in the past year, a $60bn current account deficit, extensive foreign exchange liabilities in the corporate sector and dwindling reserves of its own.
But after the currency hit an all-time low against the dollar on Monday, the central bank announced an extraordinary MPC meeting. The currency has since rallied to about TL2.265.
The central bank’s previous reluctance to consider a rate increase came in the context of Mr Erdogan’s sustained attacks on “an interest rate lobby”, which he says is trying to enfeeble Turkey’s economy. He has used such rhetoric frequently in the midst of a continuing political battle with the followers of Fethullah Gulen, a preacher and former ally with many supporters across Turkish society and in state institutions.
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Such theories win few, if any, adherents outside Mr Erdogan’s political base in Turkey, and the prime minister has also suggested that high interest rates lead to higher inflation – the opposite of mainstream economic thinking. Nevertheless, analysts have concluded he remains the ultimate arbiter of the country’s monetary policy, despite the central bank’s formal independence.
“The central bank has not all of a sudden freed itself from the political shackles,” wrote Abbas Ameli-Renani at RBS in a note on Tuesday, highlighting headlines in a pro-government newspaper calling on the bank not to increase interest rates. “Rather it has most likely been given some modest wiggle room given the backdrop of lira depreciation towards 2.40 lira [to the dollar] that we saw on Monday.”
Mr Ameli-Renani added that as a result he was not expecting an interest rate rise bigger than 2 to 2.5 percentage points, and that the currency would remain weak even if its decline became “more modest and gradual”.
At a press conference on Tuesday, Erdem Basci, the central bank governor, insisted the bank was independent. Hinting at a likely increase in interest rates, he said the bank would use all the instruments at its disposal as it had on occasions in the past.
Mr Basci also unveiled a shift in the bank’s inflation forecast for this year – from 5.4 per cent to 6.6 per cent – arguing that 0.5 percentage points of the increase was due to the lira’s fall, with the remainder due to new taxes and food inflation.