Turkey boosts interest rates sharply as it looks to stem lira’s slide

Turkey has sharply increased its main interest rate in a move aimed at halting a slide in the lira that has threatened to pour fuel on inflation that is already running well above the central bank’s target.

The monetary policy committee lifted the one-week repo rate by 2 percentage points to 19 per cent, exceeding the consensus in a Bloomberg poll of economists who had predicted a 1 percentage point increase.

The decision sparked a rally in the lira, which has endured heavy selling pressure since mid-February. The currency climbed more than 2 per cent to TL7.31 against the dollar following the decision. It is still down more than 5 per cent since its high earlier this year.

“The MPC has decided to implement a front-loaded and strong additional monetary tightening,” the central bank said in a statement, citing upside risks to inflation.

“The tight monetary policy stance will be maintained decisively, taking into account the end-2021 forecast target, for an extended period until strong indicators point to a permanent fall in inflation and price stability,” it added.

Consumer price inflation in February accelerated for the fifth month in a row to an annual rate of 15.6 per cent, lifted by global energy prices and the lira’s record decline last year, which caused a sharp rise in the cost of imports. The central bank’s year-end inflation target is 9.4 per cent, although its medium-term goal is 5 per cent.

A historic fall in the lira last year forced President Recep Tayyip Erdogan in November to replace his economy team, including the central bank governor.

The new governor, Naci Agbal, raised interest rates by 6.75 percentage points late last year. He was initially successful in steadying the lira, which had weakened past TL8 in a bout of severe selling.

However, the currency has come under renewed strain as a sharp rise in developed market interest rates triggered by a sell-off in US government bonds has prompted outflows from emerging markets.

Ahead of the meeting, investors questioned the extent to which Erdogan, a vocal opponent of high borrowing costs, would allow the central bank to boost interest rates.

“Today’s tightening reveals the bank has leeway to act when the inflation outlook warrants it,” said Maya Senussi, senior economist at Oxford Economics.

Agbal “is clearly keen to embellish his inflation-fighting credentials
and thus was willing to go above and beyond what investors had
demanded,” added Jason Tuvey at Capital Economics, who said he expected the policy rate to stay at 19 per cent throughout 2020.

“Bringing inflation down on a sustained basis will require the
central bank to break with the past and move slowly with monetary
easing to keep real interest rates high for a prolonged period.”