The Turkish Central Bank raised its highest key interest rate on Wednesday in a crisis meeting that bowed to financial market pressures after the government rejected the higher borrowing costs.
The central bank increased its late-liquidity window rate by 300 basis points to 16.5 percent, according to an extraordinary meeting of the monetary policy committee on Wednesday. It kept other sentences unchanged and described the move as "strong monetary tightening", saying that it was ready to use all instruments. The lira reversed losses after dropping 5.5 percent early to a record low.
The central bank reacted after three weeks of turbulence on the Turkish foreign exchange markets. Turkish President Recep Tayyip Erdogan, who wants to be re-elected next month, has publicly opposed any rate hike, while investors and economists argue that this is the only way to stop the flight.
In a televised speech after Wednesday's move, Erdogan did not explicitly mention the rate hike, but he tried to reassure investors by pledging allegiance to the global principles of monetary policy. He told Bloomberg in an interview in London this month that he would seek more control over monetary policy by winning the June 24 vote.
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1; election campaign on Thursday, as polls show he faces a tougher challenge than previous polls. Englisch: emagazine.credit-suisse.com/app/art … = 263 & lang = en. He will also speak with the state TRT in an interview at 11am. Turkish time on Wednesday
"It is high time to restore monetary credibility and restore investor confidence," said Deputy Prime Minister Mehmet Simsek, Cabinet's leading Turkish Minister of Economy, on Twitter after the Central Bank meeting. He expressed his support for the bank "by doing the necessary to stem the decline in the lira and achieve price stability."
The Lira gained 22 percent to 4.5672 per dollar at 22.00. In Istanbul. In the past, it even fell 5.5 percent. The collapse of the lira this year has put many Turkish foreign currency borrowers at risk of borrowing.
The increase by 300 basis points on Wednesday was "the minimum," said Ozlem Bayraktar Goksen, chief economist at Tacirler Securities in Istanbul after the decision
"There will still be expectations for further rate hikes as consumer inflation increases due to the recent lira weakness accelerates, "she said. "It has already done harm to the economy."
The central bank's rate-setting committee was not scheduled to meet until June 7, and it had not communicated with markets a week before Wednesday
| What our economists say
"This move brought relief to the lira in the short term, reversing its losses today, but it does not address the underlying problem – the direction that President Recep Tayyip Erdogan is leading the country in. So that the lira can make a major recovery, it would require at least one more major rate hike. "
– Jamie Murray and Ziad Daoud, Bloomberg Economics
Read Turkey Responding for More
The bank started in January 2017, lenders in what was previously under-utilized to force late liquidity windows. In November of the same year, it became the sole source of money for commercial banks.
The central bank fails to enter any of its various interests rated a benchmark. Governor Murat Cetinkaya said in April he could soon finalize a plan to simplify monetary policy. This would probably lead to a framework more in line with global standards, with a single interest rate for all central banks to commercial lenders.
( Updates with speech by President Erdogan from the fourth paragraph. )