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Turkey surprises with rate hike that lifts lira from record low

FILE PHOTO: Turkey's Central Bank headquarters in Ankara, Turkey, April 19, 2015. REUTERS/Umit Bektas
2020-09-24

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SULAIMANI — Turkey’s central bank unexpectedly raised interest rates by 200 basis points to 10.25% on Thursday (September 24), its first policy tightening in two years, after the lira hit a series of record lows and inflation remained stuck in double-digits.

The lira slid as much as 23% against the US dollar this year as concerns grew over the central bank’s depleted reserves, costly state interventions in the forex market and Turks’ surging demand for hard currencies, according to Reuters.

The bank - which was widely expected to hold policy steady - said a fast economic recovery from the initial coronavirus shock kept prices elevated.

“Inflation followed a higher-than-envisaged path,” its policy-making committee said. “Tightening steps taken since August should be reinforced in order to contain inflation expectations [and] to restore the disinflation process,” it said, nodding to recent backdoor moves to tighten money supply.

Only three out of 17 economists in a Reuters poll had predicted the central bank would hike its policy rate on Thursday, in part because of perceived pressure from President Tayyip Erdogan's government for stimulus.

The lira firmed to as much as 7.56 against the dollar after the rate announcement, from around 7.71 beforehand. It stood at 7.6350 at 1115 GMT. It was the strongest intraday rally in about a month.

The policy rate remains below the annual consumer price inflation rate, which stood at 11.77% in August, leaving real rates negative for lira depositors.

The central bank had held its one-week repo rate steady at 8.25% at its last three meetings, following a nearly year-long easing cycle that saw the rate cut aggressively from 24%.

As the lira declined over the past two months, the central bank resorted to back-door measures that lifted the weighted average cost of funding to 10.65% as of Wednesday, from a low of 7.34% on July 16.

The median estimate in a Reuters poll for the weighted average cost of funding at end-September was 10.70%. The forecasts of the 12 economists who responded to the question ranged between 10.5% and 12.25%.

Tensions with Greece and the European Union over the east Mediterranean exploration rights have also weighed on the lira, though the risk of sanctions eased this week.

(NRT Digital Media/Reuters)