Turkey’s rate rise to ease pressure on Lira and reserves: Fitch

LONDON – Anadolu Agency

Corrowing rates were hiked to 8 percent from 3.5 percent, and the lending rate increased to 12 percent from 7.75 percent following Turkish Central Bank's midnight move on Jan 28. REUTERS photo

Turkey’s increased interest rates will reduce the sovereign’s vulnerability to short-term capital outflows and could ease pressure on the Turkish Lira and reserves, Fitch Ratings said Jan. 29.

“Rate increases will dent domestic demand and could renew concerns about an economic ‘hard landing.’ But the fall in the lira and improved prospects for global economic recovery, particularly in the eurozone, hold out the prospect of higher net exports and a faster current account adjustment,” the ratings agency said.

Turkey’s Central Bank raised its interest rates at midnight on Jan. 28; borrowing rates were hiked from 3.5 to 8 percent, and the lending rate increased from 7.75 to 12 percent. The move came after the lira went into free fall against the dollar and euro amid an ongoing political crisis stemming from a graft investigation.

Fitch stressed that higher interest rates could provide authorities with better tools to adjust policy settings, despite its impact on growth prospects.

“Turkey’s Central Bank action shows that monetary policy adjustments are still possible despite the political desire to maintain growth. It acknowledges the limitations of macro-prudential measures to restrain the current account deficit and inflation, and of foreign exchange market intervention to halt the lira’s depreciation,” Fitch said, adding that a modest loosening of fiscal policy would not be surprising ahead of local and presidential elections.

“A more stable lira would lessen banks’ foreign exchange risks, resulting from the foreign exchange market lending to sometimes un-hedged corporate borrowers,” Fitch said.

The ratings agency, which had assigned Turkey’s credit rating to ‘BBB’ minus with a stable outlook, confirmed that rating and sector outlooks were stable despite the turmoil.