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Turkish central bank raises interest rates to 15% from 10.25% — lira gains ground

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The Turkish central bank on Thursday raised key interest rates to 15 per cent from 10.25 per cent, in a move that met analyst expectations and sent the lira higher against major currencies.

The Turkish lira rose about 2 per cent to about 8.90 against the euro from about 9.15. Traders forecast continuing gains, as the appointment of Naci Agbal as central bank governor, working with the newly appointed Finance Minister Lutfi Elvan.

“The tightness of monetary policy will be decisively sustained until a permanent fall in inflation is achieved,” the central bank said in a statement  after the policy meeting on Thursday. The central bank indicated that the weekly repo rate, which is the one that has been raised, would be considered the main funding rate.

“This was absolutely the right and logical decision,” said Timothy Ash, senior EM sovereign strategist at Bluebay Asset Management in London.

“What is important here is that the central bank is finally acknowledging that Turkey has acute inflation, dollarisation, forex reserve meltdown, a current account deficit and credibility problems,” notes the economic analysis team at Paraanaliz.

Some analysts are already predicting a flow of foreign capital back into Turkey, but other feel that the move may be too late to avert a balance of payments crisis.

Cristian Maggio, head of emerging markets strategy at TD Securities, told Reuters that the interest rate hike was “important but it has some drawbacks.”

“Simplification of central bank policies has been introduced and tightening has been introduced, but tightening in large scale has not been introduced. Rather than looking at the decision as one and done, the CBRT will have to embark on a long tightening cycle.”

The Turkish central bank needs a defence of the lira to shore up its lack of reserves, which have dwindled in a futile $140 billion campaign to support the lira.

“Certainly, this is the first move in the right direction,” one analyst noted. “But it will take much more than this to repair the damage that has been done, and it’s not clear that Erdogan is prepared to go that far. He has also promised structural reforms, but there has been no accompanying announcement of such changes.”

There is concern that we will see a repeat of what happened from August 2018 to July 2019, Paraanaliz warns: “That is; with market pressures mounting, theTurkish central bank hikes the rates excessively, inflation starts to decline, and rate cuts are then forced by the President himself until the economy sinks into chaos again.”

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