Turkey’s Central Bank raises interest rate to stop lira falling

ANKARA/ ISTANBUL

The Central Bank had been expected to raise the rate in a controlled manner, as it signaled that it may do so to stabilize a plunging lira, after intervening to shore up the currency as it sank to record lows. DHA Photo

Turkey’s Central Bank raised its overnight lending rate from 6.5 to 7.25 percent with a 75 base point increase at a policy meeting July 23 to stop the lira falling, but the Bank kept its one-week repo policy rate at 4.5 percent and its borrowing rate at 3.5 percent.

“In order to support price and financial stability, the committee has decided to raise the upper boundary of the interest rate corridor,” the statement said.

The lira strengthened to 1.9081 against the dollar from 1.9153 before the statement. The Central Bank had been expected to raise the rate in a controlled manner, as it signaled that it may do so to stabilize a plunging lira, after intervening in the first half of July to shore up the currency as it sank to record lows.

The Bank has sold around $6.6 billion at many auctions this year to support the lira, which slid to its weakest ever level against the dollar two weeks ago, mainly due to the U.S. Federal Reserve’s (Fed) first strong signals of tapering the high liquidity in the global markets by 2014.Uncertainties about the continuation of the Fed’s bond-buying program have hit emerging markets in general, including Turkey.

The capital inflow to the Turkish markets has also been shaken by the countrywide demonstrations since the end of May.

Prime Minister Recep Tayyip Erdoğan blamed an “interest rate lobby” for supporting protests to weaken Turkey.

“Who gained from these three weeks of protests? The interest rate lobby, Turkey’s enemies did. Who lost from these protests? Turkey’s economy,” he said.He has long championed low interest rates, fearing an economic slowdown. But the Central Bank has already consumed from its reserves this year to try to boost the lira, a policy that cannot to be continued long in such fluctuating global markets, experts said.

Rates may go higher

“The rates may need to go higher if market stress continues. The Central Bank has probably done the minimum it needed to do,” Neil Shearing, chief economist at Capital Economics, told Reuters.
“The Central Bank may raise the rate to around 7.75 bps from 7.25 by keeping its one-week repo policy rate at 4.5 percent to prevent any negativities of a possible rise in the country’s growth rates and to keep the lira afloat,” Egemen Candır, research manager at Istanbul-based Integral Menkul Değerler, told the Hürriyet Daily News in an e-mailed statement.

The Central Bank chose to raise the overnight lending rate to increase the real interest rate on lira assets and makes them more attractive to foreign investors, supporting the currency, experts say.

“Even with this rate hike we expect the Bank to tread carefully: Growth is still fragile and Erdoğan will not be too happy with the Central Bank quenching growth, considering the upcoming elections,” Nordea Bank analyst Annika Lindblad told Reuters.