ISTANBUL: Turkey’s central bank raised its benchmark interest rate by 50 basis points on Thursday, defying President Tayyip Erdogan’s drive for cheaper credit and increasing borrowing costs for the first time in nearly three years.
The lira, which has lost some 14 per cent of its value this year and hit a series of record lows, has been battered by the dollar’s resurgence following Donald Trump’s victory in the US presidential election and by domestic security worries after a failed July coup.
Erdogan, who has described himself as an “enemy” of interest rates and chastised banks for what he says is the high cost of credit in Turkey, wants the central bank to reduce borrowing costs to help spur flagging economic growth.
The lira firmed to 3.3770 to the dollar after the decision after falling to a record low of 3.4211 earlier in the session.
The Istanbul share index was up by 0.5 per cent.
The bank raised the benchmark one-week repo rate to 8 per cent from 7.5 per cent, more than the 25 basis point hike forecast by 12 out of 19 economists polled by Reuters.
“Exchange rate movements due to recently heightened global uncertainty and volatility pose upside risks on the inflation outlook,” the central bank’s monetary policy committee said in its statement.
“The committee decided to implement monetary tightening to contain adverse impact of these developments on expectations and the pricing behaviour.” It also increased its overnight lending rate — the highest of the multiple rates it uses to set policy — to 8.5 per cent from 8.25 per cent. It left its overnight borrowing rate unchanged at 7.25 per cent
“The bank’s action was stronger than what the market was looking for. In that regard, we see the bank’s decision as positive,” said Ozgur Altug, chief economist at BGC Partners in Istanbul.
He said the central bank had sent a message that it could raise interest rates when needed, although he suggested it may be a one-off move rather than the start of a tightening cycle.
Shortly before the rate decision, a chief adviser to Erdogan, Bulent Gedikli, said there were no foreign exchange problems for the state, banking sector or individuals and that it was wrong to present currency fluctuations as unhealthy.
On the eve of Thursday’s meeting, Erdogan said he had a right to criticise the central bank despite its independence.
“Since I took on the job of leading Turkey 14 years ago, I have only fallen short of making headway in a few areas that I desired. One of those is the cutting of interest rates,” he said in a speech at the stock exchange.
“I have nothing against the independence of the central bank, but I cannot allow my people’s will and rights to be taken away with high interest rates,” he said.