Published: Sat, May 26, 2018
Markets | By Erika Turner

Turkish Central Bank hikes interest rates

Turkish Central Bank hikes interest rates

Turkish lira bounced back from historic low 4.90 to 4.55 against the USA dollar after the Central Bank raised benchmark lending rate from 13,5% to 16,5% following an emergency meeting on Wednesday to prevent a full-scale currency crisis. It kept other rates unchanged, describing the move as a "powerful monetary tightening" and saying it's ready to continue using all instruments.

Things began to fall apart when President Erdogan who was in London for a three-day visit to calm concerns of worldwide investors told Bloomberg last week that he would seek a greater say in shaping monetary policy.

Erdogan has called for low interest rates to ensure strong growth.

The lira reversed losses after earlier plunging as much as 5.5 percent to a record low.

Many investors want to see a rise in interest rates to bring down inflation, which is in double figures.

In a more than hour-long interview with state-run TRT TV that ran past midnight on Thursday, Erdogan wasn't asked about the economy, the lira or interest rates.

The situation has not been helped by Erdogan himself who has consistently pressured the central bank to keep rates down to boost growth.

Emerging markets' local currencies have been weakening against the US dollar since the beginning of this year.

The lira dropped to over 4.91 against USA dollar on Wednesday morning, down about 6 percent since Tuesday, before recovering some of its losses in the day, but still very prone to fluctuation.

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The next meeting of Turkey´s central bank is not due until June 7 but economists believe an emergency - and substantial - rate hike by the central bank is not only on the cards, but essential. He expressed his support for the bank "in doing what's necessary to stem the slide in lira & achieve price stability".

The dollar hit 4.66 against the lira on Tuesday, breaking two psychological marks at 4.60 and 4.65, before stabilizing at the 4.63 - 4.64 level.

The U.S. dollar/Turkish lira rate was at 3.78 at the beginning of this year while last year one U.S. dollar traded for 3.65 lira on average.

The 300 basis-point increase on Wednesday "was the minimum", Ozlem Bayraktar Goksen, chief economist at Tacirler Securities in Istanbul, said after the decision.

However, on Wednesday he tweeted his full support for the country's central bank.

"But we will not let global governance principles finish off country", he said, according to Financial Times.

The bank began forcing lenders into the previously little-used late liquidity window in January 2017.

"When the people fall into difficulties because of monetary policies, who are they going to hold accountable?" he said. That would likely result in a framework more in line with global norms, with a single rate governing all central-bank funding to commercial lenders.

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