Turkey's Central Bank raises interest rates by 2%

September 24, 2020: Turkey's central bank has raised its main interest rate for the first time since September 2018, boosting it by two percentage points to haul the lira up from historic lows.

The bank said the one-week repo rate would go from 8.25 percent to 10.25 percent.

The lira gained around one percent in value against the US dollar within minutes of the announcement, after touching a record low of 7.71 earlier in the day.

"Massive surprise, and positive," said Timothy Ash, an analyst at BlueBay Asset Management.

The coronavirus pandemic has forced nations worldwide to cut rates to revive their stalled economies.

But Turkey has been burning through its hard currency reserves to support the lira, which has lost nearly 22 percent of its value against the dollar this year and is one of the world's worst performing emerging market currencies.

The Moody's ratings agency estimated on Monday that Turkey's hard currency reserves were now at a 20-year low.

A central bank statement said it "decided to increase the policy rate by 200 basis points to restore the disinflation process and support price stability".

Inflation edged up to 11.77 percent in August from 11.76 percent in July but it has remained stubbornly in the double digits in the past few years.

This means that Turkey is running a negative real interest rate, where bank deposits and bonds lose value over time, forcing investors out of the market and Turkish nationals to convert their liras into dollars or euros.

The bank last increased its main rate in September 2018 from 17.75 percent to 24 percent owing to a currency crisis caused by tense relations with the United States.

But President Recep Tayyip Erdogan opposes high rates, once describing them as "the mother and father of all evil", and called for them to be lowered to stimulate growth.

Erdogan last year sacked the bank's governor and appointed Murat Uysal, under whose direction the rate has been cut nine times.

Ash said the rate decision "suggests the (bank) listened to the market and decided they had to move to avoid a disorderly devaluation and potential balance of payments crisis."

"They are not out of the woods yet, but they have given themselves a fighting chance."

APP