Turkish central bank raises interest rates; lira at 8.75 to euro

The central bank of Turkey on Wednesday raised its key interest rate to 19 per cent from 17 per cent.

The lira rose to about 8.75 against the euro from over 9 to the euro.

The move surprised analysts who had almost unanimously forecast a 1 per cent rate hike.

The interest rate hike will help to control surging inflation in Turkey which was last reported at about 16 per cent.

It also repaired credibility for the central bank which had been subject to political pressure from the Turkish presidency to keep interest rates as low as possible.  It seems clear that Central Bank Governor Naci Agbal will have the independence needed to defend the currency.

The central bank had previously lifted the policy rate from 10.25 per cent to 17 per cent with hikes in November and December. The benchmark rate was held steady in January and February meetings.

Economists overwhelmingly expected a 100 basis-point rate hike to 18 per cent at the Monetary Policy Committee (MPC) meeting Thursday to help tackle the inflation. In a Reuters poll, 19 out of 20 economists forecast a hike, as did Société Génerale,  Citigroup and JPMorgan.

The newly announced price stability committee will complement and strengthen the hand of the central bank’s monetary policy, Turkey’s treasury and finance minister said Tuesday, in remarks that come just ahead of the highly anticipated interest rate decision.

Discussing the reform plans announced by President Recep Tayyip Erdoğan on Friday, Treasury and Finance Minister Lütfi Elvan said Turkey needs a holistic approach, including fiscal, structural and monetary policies to battle inflation. He said monetary policy alone cannot deal with supply shocks.

“The price stability committee will strengthen the hand of the central bank” and focus on developing solutions to supply shocks that pose inflation risks, Elvan said at a press conference.

Policymakers decided to “implement a front-loaded and strong additional monetary tightening” to tackle the upside risks to inflation, the central bank said in the statement accompanying the rate rise announcement.

The governor has pledged to maintain a tight monetary policy stance until he meets his 5 per cent inflation target, no earlier than 2023. The Turkish statistics agency will publish March inflation data on April 5.

“Well done Ağbal,” said Tim Ash, a senior emerging markets strategist at BlueBay Asset Management in London. “Not 20 percent as I suggested but exceeding market expectations. He is proving himself a serious, capable central banker.”

The rate hike may help encourage Turks to switch their foreign currency savings for lira. They bought tens of billions of dollars of foreign currency last year to protect against inflation and the lira’s depreciation.

Average interest rates on one-month lira deposits stood at 15.6 percent as of March 5, barely enough to compensate for the erosive effects of inflation – some economists estimate real inflation at 32 per cent.

The increasing global price of oil and other commodities suggests that consumer price inflation will accelerate to between 18 to 19 per cent by April. At the same time, public confidence in inflation data announced monthly by the Turkish Statistical Institute has deteriorated further, making it even less likely that locals will sell their foreign currency, according to Turkish economist Güldem Atabay.