Monday, January 30, 2023

Turkey raises interest rates again to restore credibility

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Turkey has raised interest rates for a second straight month as the country’s new central bank chief continues his drive to rebuild his shattered credibility.

The bank’s monetary policy committee, headed by the new governor Naci Agbal, announced Thursday that it would raise its main interest rate from 15% to 17% – its highest level in more than a year.

The increase was greater than economists’ median expectation of a 1.5 percentage point hike, according to a Bloomberg survey. It is likely to be greeted by foreign investors as a sign that Mr Agbal, who was appointed last month, has been given leeway by President Recep Tayyip Erdogan, a notorious opponent of high rates.

“Governor Naci Agbal is making great strides in rebuilding the central bank’s shattered credibility and unraveling the damaging policy decisions of the past,” said Jason Tuvey, senior emerging markets economist at consultancy Capital Economics.

The lira gained about 0.8% on the move, reaching 7.57 to the dollar.

In a statement, the central bank said it had decided to implement “strong monetary tightening” in order to bring inflation down as quickly as possible. The annual price growth is almost three times the bank’s official 5% target, according to November data.

Turkey’s tightening cycle is rare, as other central banks have cut rates this year in a bid to prop up their economies against the fallout from the coronavirus pandemic.

But analysts had long warned that rate hikes were needed after a credit expansion by Turkish banks put heavy pressure on the country’s currency. Reading it plunged through a succession of record low August of this year and pushed the country to the brink of a full-fledged financial crisis.

Mr Erdogan, who in recent years has repeatedly pressured the central bank to lower interest rates, did a dramatic about-face last month by sacking the former central bank governor and appointing Mr. Agbal in his place.

The upheaval also triggered the departure of his son-in-law, Berat Albayrak, who resigned from his post as Minister of Treasury and Finance after a two-year stint marred by crises and a failed monetary intervention that severely exhausted Turkey’s foreign exchange reserves.

Mr Agbal, a former bureaucrat and member of parliament for the ruling party, set out to try to repair the reputation of the central bank.

At its first pricing meeting last month, it Student The bank’s main rate of 4.75 percentage points to 15 percent. This decision was largely symbolic, as it hardly changed the real cost of funding.

Thursday’s decision builds on that decision, leaving the real interest rate at 3 percent taking into account annual inflation, which was 14 percent in November.

The sudden change of course by the central bank helped to attract international investors, who had staged an exodus of Turkish assets this year. Foreign investors bought nearly $ 4 billion in Turkish stocks and bonds in the six weeks leading up to December 18, data showed Thursday.

But it will be more difficult to restore the confidence of skeptical Turkish investors, analysts said.

High inflation, low deposit rates and currency volatility have pushed locals towards currencies and gold, exacerbating pressure on the lira.

The trend has continued even in recent weeks due to a “lack of confidence” in central bank policies among Turkish savers and investors, according to Enver Erkan, economist at Istanbul-based Tera Investments.

Mr Erkan said Thursday’s decision could help change sentiment, while warning it would take time. “When locals feel less inflation, they will act differently and move to pound deposits [foreign exchange] deposits, ”he says.


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