Turkey has announced its biggest interest rate rise in more than two years as it signalled a change of direction after a drastic shake-up in the country’s economic management.
In the first rate-setting meeting chaired by new central bank governor Naci Agbal, the bank moved to tame double-digit inflation and bolster the Turkish lira by lifting its benchmark one-week repo rate by 4.75 percentage points to 15 per cent.
The lira jumped almost 3 per cent against the dollar immediately after the decision, before trimming its gains to 1.9 per cent, or TL7.56. Turkey’s currency is still down 22 per cent since the end of last year.
The lira suffered months of record lows before the shock resignation of President Recep Tayyip Erdogan’s son-in-law Berat Albayrak as finance minister 10 days ago. Investors had grown increasingly alarmed by the management of the economy on the 42-year-old’s watch, especially the apparent reluctance to tackle inflation or halt the downward spiral in the currency and the erosion of the country’s foreign currency reserves.
Thursday’s decision was seen by many investors as evidence that Mr Erdogan, a staunch opponent of high interest rates, had given the incoming governor a mandate to act — at least in the short term — to stabilise the currency and tempt a much-needed wave of foreign capital back into Turkish markets.
Ehsan Khoman, head of Mideast and north Africa research and strategy at Japanese bank MUFG, said the central bank had needed to “wow markets, restore credibility and predictability” and had done “exactly that”.
Yerlan Syzdykov, global head of emerging markets at asset manager Amundi, described the decision as “unequivocally a good result”.
The rate rise, which was in line with the expectations of economists surveyed by Bloomberg, takes the one-week repo rate to slightly higher than the average interest rate that the central bank had been charging to supply funding to the Turkish financial system in recent weeks.
It had been using a complicated system of multiple rates that appeared to aim to tighten monetary conditions without incurring the wrath of the president, and had brought the effective cost of funding provided by the bank to 14.8 per cent by Wednesday.
An announcement by the bank that it would provide all funding through the one-week repo rate means that, following Thursday’s decision, the actual increase in the interest rate it levies will only rise by 0.2 percentage points.
But the move was welcomed by investors and analysts as a sign that the bank was returning to a more conventional approach to monetary policy.
The increase “might not seem like much in light of what was at stake”, said Jason Tuvey, a senior emerging markets economist at Capital Economics, the consultancy. “But investors were always more focused on whether the decision would mark a shift towards orthodox policymaking — that is, a transparent monetary policy framework based on one main policy rate.”
Turkey was stunned by the shock resignation earlier this month of Mr Albayrak, who wielded significant power across government and was widely viewed as Mr Erdogan’s chosen political heir.
The former business executive, who is married to the president’s daughter Esra, quit after mounting public discontent about the economy spurred his father-in-law into firing the then central bank governor Murat Uysal. His replacement, Mr Agbal, was known for being critical of Mr Albayrak’s approach.
Investors, many of whom are desperately hunting for returns at a time when the global pile of negative-yielding debt is at a record high, have welcomed the decision to appoint Lutfi Elvan, a market-friendly former bureaucrat, as new finance minister, as well as a pledge by Mr Erdogan last week that Turkey would “swallow a bitter pill” if necessary to put the economy back on track.
Mr Syzdykov, who oversees funds worth $14.6bn, said Amundi had increased its exposure to Turkey across a range of asset classes in the wake of Mr Albayrak’s departure. “It’s a very significant step for Erdogan. I think it shows he can be flexible,” he said.
“Of course the tendency of Erdogan to intervene will not go away. It’s just that I think he now realises the seriousness of the situation with the economy.”
Wolfango Piccoli, co-president of Teneo Intelligence, the consultancy, was more cautious. He said the record of Mr Erdogan, who is notorious for meddling in the central bank, could quickly “return to his default standing, pumping credit prematurely, revving inflation and depressing the [lira] again”.
The path to an economic recovery was narrow, he added, especially given the coronavirus crisis and the fact Mr Erdogan had repeatedly ruled out the prospect of turning to the IMF for help.
Additional reporting by Adam Samson in London