Surprise Rate Hike By Turkish Central Bank, Currency Rallies

Just a few before the presidential and parliamentary elections in Turkey, the country’s central bank announced a sharp rise in the primary interest rate aimed at reigning in the rising rates of inflation and to stabilize the currency lira.

The one-week repo rate was increased by 1.25 percentage points to 17.75 per cent. There was rally in the lira following the news as it reached TL4.45 against the US dollar compared to TL4.58 prior to the announcement.

It has been just days that the average rate of inflation in the country in May was 12.15 per cent compared to 10.85 a month ago. there could be further pressure on price growth because of a higher fuel prices and a falling currency where the lira has fallen by as much 15 per cent against the US dollar so far this year.

The central bank said, “despite the mild outlook for demand conditions, elevated levels of inflation and inflation expectations continue to pose risks on the pricing behavior,” while making the announcement.

“The central bank will continue to use all available instruments in pursuit of the price stability objective. Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement,” it added.

There are concerns among experts that there can be a ‘hard landing’ for the Turkish economy as it is going too hot which has reduced confidence in the economy. Analysts have also criticized the central bank of being late for reacting slowly to the developments in the economy.

The anguish has been enhanced the well publicized belief of president Recep Tayyip Erdogan that high inflation would be the outcome of the higher interest rates. Recently, the president had made indicated that he wanted to take control of the interest rates and called them the “mother and father of all evil”.

“For a number of years, the credibility of Turkey’s policy institutions has been undermined by the ineffectiveness of monetary policy, in part reflecting political interference in the policymaking process,” Moody’s said last week. The ratings agency had held up the credit rating for Turkey on review for a downgrade. The forecast for economic growth of the country has been downgraded by the ratings agency from 4 per cent to 2.5 per cent for 2018.

The central bank’s move would “help improve sentiment, and stabilise the market a bit into the elections”, said Timothy Ash, senior emerging market sovereign strategist at BlueBay.

Charles Robertson, global chief economist at Renaissance Capital said that the rise in rates was a “positive step which shows Turkey has re-committed to orthodoxy.”

Last month, after the fall of lira to a record low of TL4.9221, a decisive step was taken by the country’s central bank as it hiked the late window lending rate by 3 percentage points.

(Adapted from FT.com)

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Categories: Economy & Finance, Regulations & Legal, Strategy, Sustainability

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