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Rate decision a test for Turkey’s central bank

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FILE PHOTO: Turkish Lira banknotes are seen in this October 10, 2017 picture illustration. REUTERS/Murad Sezer/File Photo

The Turkish central bank decides Tuesday whether to hike interest rates to push down inflation and support the flagging lira in a crucial test of its credibility one month after President Recep Tayyip Erdogan’s election win spooked investors.

Erdogan won a second mandate with an outright victory in the June 24 elections but fears over economic policy were raised when he chose his son-in-law and ex-energy minister Berat Albayrak, 40, as treasury and finance minister.

The president had already alarmed investors by vowing to have a greater say in monetary policy and continually pressing the bank to reduce rates to boost growth, in a challenge to the central bank’s independent status.

And in comments that numbed some market players, Erdogan in May dubbed interest rates as “the mother and father of all evil”.

But economists say the economy needs higher rates, with inflation hitting 15.4 percent, the lira losing some 25 percent against the dollar this year and the current account deficit widening.

‘Reignite concerns’
The one-week repo rate, which the bank has made clear is its main policy rate, currently stands at 17.75 percent following an emergency hike of 3.0 percent points on May 23 and another 1.25 percentage point hike on June 7.

Despite the dramatically sharp hikes inflation has still surged and the currency continued to lose value against the dollar and euro.

Economists forecast a hike in the range of between 0.75 to 1.50 percent when the decision is announced at 1100 GMT, warning the lira is likely to come under new pressure if the bank fails to show a strong stance.

Investors’ uneasiness increased after the elections when Erdogan gave himself the power to appoint the governor of the central bank unilaterally.

Jason Tuvey, senior emerging markets economist at London-based Capital Economics, said anything less than one percentage point hike would “reignite concerns” over the bank’s independence.

It would also raise alarm over the bank’s “ability and willingness to tackle high inflation”, he said, warning that a sell-off in the lira would inevitably follow and “ultimately force the (bank) into an emergency rate hike further down the line”.

‘Not fight with markets’
Since his appointment, Albayrak has sought to reassure markets and present himself as trustworthy on the economy, insisting the central bank’s independent status would not be “a subject of speculation”.

The lira lost 3.5 percent in value against the dollar in the first few hours after Albayrak’s new role was announced.

But Albayrak on Monday tweeted that he would hold regular meetings with economists, sending as well images of a meeting he held with academics and other experts.

He told reporters on the flight to the G20 finance ministers’ summit in Argentina that Turkey would “not fight with the markets” and would seek a “win-win” relationship.

Yet Anthony Skinner, director of Middle East and North Africa at the Verisk Maplecroft consultancy, said the bank could “marginally” cut rates, refrain from touching them or agree a “superficial hike” approved by Erdogan.

“Erdogan would prefer not to renege on his repeated campaign pledge to cut rates over the coming months in order to boost economic growth and demand, despite the associated risk of a currency and economic crisis,” said Skinner.


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