Turkey surprises with first interest rate hike in two years

Darnell Taylor
September 27, 2020

Immediately after this decision, the Turkish lira firmed by 1.1 percent to 7.62 against the US dollar.

Investors were cheered by the hike of the bank's one-week repo rate from 8.25 percent to 10.25 percent because it also demonstrated the bank's independence in the face of President Recep Tayyip Erdogan's firm opposition to higher rates.

The Turkish national currency, losing over 20 percent of its value against the dollar this year as the COVID-19 pandemic has deepened Turkey's already existing vulnerabilities.

"Massive surprise, and positive", remarked Timothy Ash, an analyst at BlueBay Asset Management.

'The government has nearly depleted the buffers that would allow it (to) stave off a potential balance-of-payments crisis, Moody's warned.

The central bank's monetary policy committee concluded that the tightening steps taken since August should be reinforced to contain inflation expectations and risks to the inflation outlook as inflation followed a higher-than-envisaged path as a result of fast economic recovery with strong credit momentum, and financial market developments, the central bank said in a statement.

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But news of the rate hike saw the lira strengthen to 7.5572 on Thursday before giving back some of those gains.

Economists and financiers had actually prompted the bank to lift interest rates in order to fend off a repeat of the currency crisis that the nation experienced 2 years earlier.

'The central bank pinned its decision on concerns over inflation, Capital Economics analyst Jason Tuvey wrote in a research note. Efforts to stabilise the currency via higher interest rates should be accompanied by the Erdogan administration accelerating the pace of structural reforms.

Last year, in eight meetings, the bank cut the rate by a total of 1,200 basis points from 24%.

"They are not out of the woods yet, but they have given themselves a fighting chance".

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