Turkey’s central bank is raising interest rates by 2 percentage points – a larger-than-expected move, analysts say, indicating that the newly installed governor is establishing monetary policy free from political pressure.
Turkey’s central bank raised interest rates by 2 percentage points to 17% on Thursday – a bigger move than expected, as it seeks to cut double-digit inflation and boost political credibility under the new governor Naci Agbal.
The lira hit its highest level in more than a month, and analysts said Agbal passed a test of his ability to free monetary policy from political pressure after just two months of work.
The bank, faced with record dollarization and a weak lira, raised its one-week repo rate by 15%. He again pledged to “decisively” maintain his policy of permanently reducing inflation, which was 14% last month and has been above target for years.
“Agbal has totally passed the test” and has shown that the bank “takes inflation seriously,” said Cristian Maggio, head of emerging markets strategy at TD Securities.
The lira – among the weakest emerging market currencies this year – rebounded as much as 1% against the US dollar and stood at 7.575 by 11:55 GMT.
The tightening follows a sharp 4.75 percentage point increase last month, which was Agbal’s first move after taking the reins of a surprise leadership overhaul in which Turkish President Tayyip Erdogan has pledged a new economic era favorable to the market.
The “strong” tightening was aimed at “removing risks to the inflation outlook, containing inflation expectations and restoring the disinflation process as soon as possible,” the steering committee said in a statement.
Economists predicted a 1.5 percentage point increase in a Reuters poll and called it a test of credibility in the face of Erdogan’s past criticism of high rates, especially with the coronavirus fallout that rocked the world. economy this winter.
But inflation is rising and is well above the 5% target range, and Turks continue to buy foreign currencies at record levels, keeping the Turkish lira close to its all-time low and pushing the bank to tighten again.
The bank said the currency purchase would reverse with inflation.
Agbal admitted last week that the lira’s decline of around 23% this year had kept inflation high, but the bank still sees it falling to 9.4% by the end of 2021.
The lack of monetary stimulus could exacerbate an economic slowdown triggered by restaurant closings and new curfews after the first wave of the pandemic severely squeezed activity in the second quarter.
But the central bank is focused on inflation and its depleted currency buffer, which on a net basis is down by more than half this year due in large part to costly government interventions in foreign exchange markets. to support the read.
Erdogan has long blamed high rates of inflation – contrary to economic orthodoxy – and held foreign investors responsible for the woes of the economy. But last month he said even “bitter” policies would be adopted.
TD’s Maggio said there would be more testing for Agbal because foreign investors have been deeply scarred by years of Turkish policies that have crowded them out of local assets.
During the 2018 crisis, the bank increased its rates to 24%.