Turkey’s central bank raised interest rates far more than expected, in the first sign that a new lineup of monetary officials favors more aggressive moves to curb inflation running near 50 percent. The lira surged as the central bank raised interest rates by 750 basis points.
The Monetary Policy Committee, under Governor Hafize Gaye Erkan, raised the rate to 25 percent from 17.5 percent and far above survey expectations. Most economists polled by Bloomberg predicted a hike to 20 percent.
Turkish assets jumped, with the lira reversing earlier losses to gain more than 2 percent against the dollar, its biggest increase on a closing basis in more than a year. The cost to insure Turkish debt against default for five years dropped below 400 basis points, and bank shares surged, with the Borsa Istanbul Banks Index climbing by nearly 6 percent.
The MPC said in a statement it “decided to continue the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior.
While the rate remains well below the level of price growth in Turkey, it’s the third straight hike since President Recep Tayyip Erdogan won reelection in May and pledged more orthodox policies for an economy foreign investors have fled in recent years.
It was the MPC’s first decision since three new deputy governors were appointed late last month. They included a former adviser to the Federal Reserve Bank of New York and the ex-chief economist at one of Turkey’s biggest private lenders.
Erkan, appointed in June, has begun to end Turkey’s era of ultra-low borrowing costs previously favored by Erdogan.
Many investors think the central bank is still being too timid. They cite the fact inflation-adjusted interest rates remain well in negative territory as evidence of that. Turkey’s real rates are among the lowest in the world.
“The pace of policy tightening over recent months has disappointed market expectations,” ING Bank NV said ahead of Thursday’s decision.
Significant Risks
Erkan’s approach poses significant risks for the credibility of the central bank, especially after it sharply raised its own inflation forecasts last month. The governor said price growth won’t peak until the second quarter of next year, but showed little willingness to raise policy rates much faster.
The bank has taken other measures to increase the cost of money.
Its latest regulation took aim at a government-backed savings program that protects account holders from any weakening of the lira. Officials now want them to convert to normal lira accounts.
The new rules amount to a “stealth rate hike” and follow an earlier decision to raise banks’ reserve requirements that could in effect mean an additional 40 basis points of tightening, according to Bloomberg Economics.
“The new measures will likely lead to higher rates on lira deposits,” Goldman Sachs Group Inc. analysts Clemens Grafe and Basak Edizgil said in a report. But “with the gap between deposit rates and the policy rate widening again, there is a risk of renewed dollarization or funds being withdrawn.”
(Edited by : Keshav Singh Chundawat)
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