Turkey’s Central Bank raised its benchmark interest rate by 50 basis points on Nov. 24 in an unexpected move, ordering the first increase in nearly three years, as a skyrocketing U.S. dollar and domestic worries continue to batter the Turkish Lira.
Defying top officials’ repeated calls for cheaper credit, the bank increased the one-week repo rate to 8 percent and lifted its overnight lending rate from 8.25 to 8.5 percent.
“The slowdown in aggregate demand contributes to the fall in inflation. However, exchange rate movements due to recently heightened global uncertainty and volatility pose upside risks on the inflation outlook,” said the bank in a written statement on its website.
“The committee decided to implement monetary tightening to contain the adverse impact of these developments on expectations and the pricing behavior,” it said.
The bank kept its overnight borrowing rate at 7.25 percent.
It also noted that future monetary policy decisions would be conditional on the inflation outlook.
“Inflation expectations, pricing behavior and other factors affecting inflation will be closely monitored and the cautious monetary policy stance will be maintained,” added the bank.
The bank’s action has mostly been welcomed by the markets, as a solid step to ease the lira-dollar parity, amid rising concerns about the independence of the Central Bank.
The lira has lost some 14 percent of its value against the dollar over this year, hit by both the strengthening dollar and investor concerns. The lira eased to 3.3770 to the dollar following the decision after falling to a record low of 3.4211 earlier in the session. The lira, however, lost ground again to record lows amid a dollar rally after the European Parliament voted to temporarily freeze accession talks with Turkey.
On the eve of the Central Bank meeting, Turkish President Recep Tayyip Erdoğan said he had a right to criticize the 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
on Nov. 23, as quoted by Reuters.
“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 added.
New measures revealed
The Central Bank also announced a number of new measures after it had revealed its rate decision.
In this vein, foreign exchange reserve requirement ratios have been decreased by 50 basis points for all maturity brackets.
“With this revision, approximately $1.5 billion in liquidity will be provided to the financial system,” said the bank in another statement.
In another step, regarding export and foreign exchange earning rediscount credits, which will come due on Dec. 31, the bank also decided that the maximum maturity could be extended until March 31, 2017.
“In the event of the payment on maturities without utilizing the maturity extension option, credit repayments can be made in Turkish Liras and the Central Bank buying exchange rates prevailing on the maturity date will be used in these transactions,” it added.