Turkey: Central Bank hikes rates to halt lira selloff
May 23, 2018
In an emergency meeting held on 23 May, the Central Bank of the Republic of Turkey (CBRT) hiked the late liquidity window rate—the rate through which all financing is currently delivered—by 300 basis points from 13.50% to 16.50%. The one-week repo rate was kept unchanged at 8.00%, the overnight marginal funding rate at 9.25% and the overnight borrowing rate at 7.25%.
The move came after the lira entered into freefall earlier in the day, briefly sinking to 4.90 per USD and extending sharp losses which have seen the currency lose around 10% of its value over the last month. Pressure on the currency has intensified after President Erdogan suggested in mid-May that if he wins the June elections he will take more direct control of monetary policy. This came following a series of remarks criticizing the CBRT’s monetary stance and high interest rates, which have shaken investors’ faith in the Bank’s independence, a fear which was compounded after the Bank initially appeared reluctant to react in the face of a growing currency crisis. The Bank’s decision was designed to help stabilize the currency and stem inflation, which remains far above the 5.0% target. Initial signs were positive, with the lira strengthening after the announcement.
In its communiqué, the CBRT once more promised to maintain a tight monetary stance until price pressures abate. In order to significantly dampen inflation and provide more than a brief reprieve for the lira, further rate hikes are likely necessary—particularly given the impact the weaker currency will have on inflation going forwards. However, severe uncertainty remains over Erdogan’s willingness to give the Central Bank full leeway to tighten policy to the degree required. In addition, the government’s expansionary fiscal stance will continue to stoke prices, making it doubly difficult for the CBRT to tame inflation.
Turkey Interest Rate Forecast
FocusEconomics Consensus Forecast panelists are taking into account the Central Bank’s latest move, and new interest rate forecasts will be released in early June.
Author: Oliver Reynolds, Economist