Turkey’s central bank has raised its key benchmark interest rate and overnight borrowing rate amid speculation it could be forced to try and halt a record-breaking slide in the lira, despite competing political pressures to keep policy accommodative.
The decision comes after Turkish president Recep Tayyip Erdogan said Turkey had “among the highest [interest rates] in the world” and implored retail banks to “please reduce interest rates to reasonable levels” on Wednesday.
Policymakers voted to raise the benchmark interest rate to 8 per cent from 7.5 per cent and the overnight borrowing rate by 0.25 percentage points to 8.5 per cent, in the first round of monetary tightening since the dramatic decision to hike rates by as much as 5 percentage points back in 2014.
Today’s decision comes after the central bank had been trimming the overnight lending rate – one of three interest rates it controls – since March but held steady last month in the face of a dramatic plunge in the value of the lira.
Fighting against a record slump in the currency, which had fallen into new uncharted territory against the dollar ahead of the decision this morning, the central bank has up to now aimed to free up liquidity by tweaking its foreign exchange and gold reserve requirements.
In addition to the rate cuts, the central bank also lowered its foreign exchange reserve requirements to free up around $1.5bn of liquidity.
In a statement, policymakers cited movements in the exchange rate as posing an “upside risk on the inflation outlook”, adding:
The committee decided to implement monetary tightening to contain adverse impact of these developments on expectations and the pricing behavior.
The lira shot higher against the dollar after the decision, reversing its daily losses to climb 0.6 per cent on the day to TRY3.3695.
Today’s decision was a sign the central bank was “reasserting its independence” in the face of political pressures, said Kevin Loane, economist at Fathom.
Nafez Zouk at Oxford Economics said the central bank would have to keep tightening to put a floor on the lira’s decline.
“Slowing domestic demand and the increasing likelihood of a referendum being held in the first quarter of 2017 to amend the constitution will mean pressure on the lira will remain high, at a time when much-needed capital flows could be threatened as the Federal Reserve proceeds with a rate hike in December”.
Here’s where we stand on the policy rates:
- Overnight lending rate: 8.5 per cent
- Overnight borrowing rate: 7.25 per cent
- Benchmark repo rate: 8 per cent
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