Turkey’s central bank raises interest rates dramatically

On Thursday, the Turkish central bank, sharply raised interest rates after a major adjustment of the economic team, which included the abandonment of President Recep Tayyip Erdogan’s son-in-law from the Finance Ministry.

The bank said the one-week repurchase rate (repo) would rise to 15 percent from 10.25 percent and that it would cancel all other lending facilities to make its policy decisions more “transparent”.

As a result, the Turkish lira appreciated 2 percent against the dollar, moments after the announcements, before some of its gains eroded.

The currency was one of the worst performing currencies among emerging markets and has lost nearly 23 percent of its value against the dollar since the start of the year.

Former Finance Minister Naji Iqbal was appointed governor of the central bank in a presidential decree published on November 7, just 16 months after his predecessor was appointed.

The next day, Erdogan’s son-in-law Berat Albayrak resigned from the position of finance minister, citing health reasons, but reports said that he left due to his objection to Iqbal’s appointment.

Jason Tuvey, chief economist for emerging markets at Capital Economics, said the rate hike “appears to have done enough to convince investors that there is indeed a positive shift in ongoing economic policymaking”.

But he noted that “with the average cost of financing remaining at 14.80 percent as of Wednesday, today’s decision amounts to an effective monetary tightening of 20 basis points”.

However, there are doubts about how long the nominally independent bank will be moving in because Erdogan believes that higher interest rates cause high inflation.

“We should not leave our investors under the pressure of high interest rates,” he said on Wednesday.

Also, Thursday’s increase does not allay concerns about depleted bank foreign currency reserves, which have shrunk by an estimated $ 140 billion since the start of 2019 in a failed attempt to defend the lira.

The annual inflation rate in Turkey reached 11.89 percent in October, and the annual rate has remained in double digits since September 2019.

The bank said it “decided to implement strong and transparent monetary tightening in order to eliminate the risks of inflation expectations, contain inflation expectations and restore the process of reducing inflation”.

Erdogan indicated that there would be a rate hike as he sought to placate the markets last week, pledging to follow free market rules.

He told Parliament that he was ready to “make sacrifices and swallow a bitter pill”.

Ali Babacan, a former Turkish deputy prime minister who split from the ruling Justice and Development Party last year, told the opposition daily newspapers that Erdogan does not usually use such language.

“It’s not his terminology,” Babacan said. “I don’t think he will use that phrase again”.