Turkey hikes rates to support currency, fight inflation

Daniel Fowler
September 27, 2020

The lira gained around one percent in value against the dollar within minutes of the announcement, after touching a record low of 7.71 to the dollar earlier in the day.

The Central Bank had long resisted pressure to raise the key interest rate due to pressure from Turkish President Recep Tayyip Erdogan to keep rates low.

In a declaration, the bank's financial policy committee stated a rate increase was required to include inflation, which stood at 11.7 percent in July- more than double the bank's 5 percent target. Before the choice, the lira had actually fallen more than 20 percent versus the dollar up until now this year. "It is a big turning point", Timothy Ash, a London-based economist covering emerging markets, said on his Twitter account.

Economists attribute the current downturn to the coronavirus pandemic and a drop in Turkey's foreign currency reserves.

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

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'The central bank pinned its decision on concerns over inflation, Capital Economics analyst Jason Tuvey wrote in a research note. As a result of coronavirus restrictions, the emerging nation's economy shrank almost 10 percent in the second quarter of this year.

The Turkish currency rallied highly on the news, up more than 1 percent versus the dollar to TL7.6020.

"The committee considers that the continuity of the disinflation process is of great importance for the decline in the country's risk premium, the fall in long-term interest rates, and the strengthening of the recovery in the economy", the CBRT said in a statement.

Turkey's problems are compounded by Erdogan's belief that higher interests rates cause inflation instead of slowing it down.

Erdogan sacked the bank's governor previous year and appointed Murat Uysal, under whose direction the rate has been progressively cut. They now have a chance of defending the Turkish lira.

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