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The Turkish Central Bank Is Resisting Escalating Inflation
The Turkish central bank is resisting escalating inflation and the fall of the lira, with a surprising increase in its key interest rates.
Yazar: Tom Roberts
Yayınlanma: 25 Eylül 2020 00:50
Güncellenme: 23 Kasım 2024 12:20
The Turkish Central Bank Is Resisting Escalating Inflation
The Turkish central bank is resisting escalating inflation and the fall of the local currency, the lira, with a surprising increase in its key interest rates. The monetary authorities decided at their interest rate meeting to increase the key rate for supplying commercial banks with money to 10.25 percent from 8.25 percent so far, as the central bank announced. It is the first rate hike in around two years.
The rate hike marks a turnaround in Turkish monetary policy. In September 2019, the central bank began to cut interest rates. The lira had rushed from record low to record low last month. After the decision, the local currency strengthened against the dollar. That was the strongest daily increase in around a month.
This year the Turkish currency has already lost 23 percent of its value against the dollar. High inflation and the central bank's exhausted foreign exchange reserves are currently affecting the local currency. In August, inflation in the country was almost twelve percent. In addition, there is the increasing demand from the Turks for hard currencies in view of the collapse of the currency.
Moody's threatens to downgrade
However, President Recep Tayyip Erdogan's decision is likely to be displeasing. Because he had repeatedly called himself an "enemy of interest". His government recently insisted on more support for the economy. Because the gross domestic product of the emerging market, which had been booming for a long time, fell by eleven percent compared to the previous quarter from April to June due to the corona crisis. Among other things, the important tourism industry clearly felt the virus pandemic.
But the foreign policy conflicts with Greece and Cyprus are also undermining trust. The rating agency Moody's recently downgraded Turkey's creditworthiness and at the same time threatened a further downgrade.
From the perspective of the central bank, a rapid economic recovery from the economic shock triggered by the crisis has pushed prices up. "Inflation has followed a path that was higher than expected," said the monetary authorities. The steps to tighten monetary policy would therefore have to be stepped up in order to contain inflation expectations.
"It's a positive move. Few people expected it," said Timothy Ash, senior emerging markets sovereign strategist at BlueBay Asset Management. Although further rate hikes would likely be needed to instill confidence in overseas investors, it was "a good first step". That is reassuring for the market.
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