Turkey's Central Bank Lifts Key Rate in Unscheduled Meeting Amid Lira's Fall

Jeannie Matthews
May 26, 2018

Investors had been betting the selloff in the lira - which has fallen about 20 percent so far this year to a series of record lows - would force the bank into action.

The bank's move came after the U.S. dollar/Turkish lira exchange rate hit a historic high on Wednesday, climbing to around 4.93.

Higher rates can support a currency and ease inflation, but could also hinder economic growth by making borrowing more expensive. Since then, the currency has lost more than half its value against the dollar.

Jason Tuvey, an economist with Capital Economics in London, says that if the central bank "continues to bow to pressure from Erdogan and refrains from raising interest rates, that would lead to an even sharper fall in the currency".

But he also argued that the currency depreciation will seriously affect businesses who deal with foreign exchange tools and will impact the economy as a whole.

"It is high time to restore monetary policy credibility and regain investor confidence", Deputy Prime Minister Mehmet Simsek said on Twitter, shortly before the central bank's announcement.

"There is an unhealthy situation in prices".

Turkish Economy Minister Nihat Zeybekci indirectly called on the Central Bank to take action before it is too late.

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"They will not allow them or give an opportunity", he said. "We're going to do this so we can be held accountable for the responsibility we've taken". Governor Murat Cetinkaya said in April that he may soon finalize a plan to simplify monetary policy.

But Turkey's currency has been hit especially hard because of the political backdrop: Though the central bank is in theory independent of the government, Erdogan has exerted pressure on the bank not to raise rates and potentially stir unrest as he prepares for early presidential and parliamentary elections next month.

A similar measure was taken Wednesday morning by the Istanbul Stock Exchange which chose to convert all foreign exchange asset needs to lira "in order to fight speculative actions aimed at creating negative image of Turkey before the elections". Following the bank's decision, the dollar/lira rate fell steeply to below 4.60.

It warned that the president's comments raised the possibility of "overall economic policy, not just monetary policy, becoming less predictable after the elections". The unit had reached another historic low earlier in the day, at 4.92 per dollar.

A botched coup in 2016 in Turkey was followed by a state of emergency which is still effective.

"Turkey's economy grew 7.4 percent a year ago and is still maintaining a growth trend at this level".

"The government is committed to maintaining fiscal discipline and accelerating structural reforms [including macroprudential measures] to reduce the current account deficit and help the Central Bank's disinflation efforts", he said.

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