Turkish Central Bank Hikes Rates to Support Currency

November 19, 2020

ANKARA — Turkey's central bank raised its benchmark interest rate on Thursday, when it held its first meeting under its new chief, in a bid to tame inflation and to prop up the struggling currency.

The bank said it was raising the one-week repo rate by 4.75 percentage points to 15%. The hike met market expectations for an increase that would help support the lira and contain inflation. 

The policy meeting was being closely watched after President Recep Tayyip Erdogan last week promised reforms and a new era in the management of the economy to attract foreign investments. Erdogan is known to have pressured previous central bank governors to keep rate lows to spur economic growth. Low rates, however, can also hurt a currency and cause inflation, scaring away foreign investors

"The Committee has decided to implement a transparent and strong monetary tightening in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process," the bank said in a statement.

"In the periods ahead, all factors affecting inflation will be taken into account, and the tightness of monetary policy will be decisively sustained until a permanent fall in inflation is achieved," the statement added.

Erdogan ousted the previous central bank chief this month, after the lira hit record lows. He appointed Naci Agbal, a former finance minister, to the post. Agbal's appointment was followed by the resignation of Erdogan's son-in-law and finance minister Berat Albayrak, who was later replaced by Lutfi Elvan, a former deputy prime minister. 

The markets reacted favorably to the new appointments and promises of reform and the lira has been firming against the dollar.

Before that, the lira plunged to record lows this year over concerns about the management of the economy, the impact of the coronavirus outbreak, reports that the central bank's reserves have been depleted and tensions with allies, including EU-members Greece and France.

Annual inflation stands at around 12% and unemployment at around 13% although opposition parties and economists caution that the official figures do not represent the full picture.


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