Turkish Prime Minister Recep Tayyip Erdogan. Picture: REUTERS
Turkish Prime Minister Recep Tayyip Erdogan. Picture: REUTERS

Turkey’s central bank raised interest rates at an emergency meeting on Wednesday and President Recep Tayyip Erdogan pledged allegiance to global principles on monetary policy, bowing to pressure from financial markets after plunging the nation into a currency crisis.

The central bank raised its late liquidity window rate by 300 basis points to 16.5%, after an extraordinary meeting of its monetary policy committee on Wednesday. It kept other rates unchanged, describing the move as a "powerful monetary tightening" and saying it’s ready to continue using all instruments. The lira reversed losses after earlier plunging as much as 5.5% to a record low. It was still 17% weaker than at the start of 2018.

The central bank acted after three weeks of largely self-inflicted turmoil in Turkish markets. Erdogan, who’s seeking re-election as president in June, has repeatedly opposed any moves to raise interest rates, referring to them as "the mother of all evil", while investors and economists argued that that was the only way to halt the rout.

In a televised address after Wednesday’s move, Erdogan did not specifically mention the rate increase, but sought to reassure investors by saying Turkey would follow global principles on monetary policy. Earlier in May, he said that high interest rates caused inflation — the opposite of what the vast majority of economists believe — and that he’d seek more control over monetary policy if he won the June 24 vote.

In a more than hour-long interview with state-run TRT TV that ran past midnight on Thursday, Erdogan was not asked about the economy, the lira or interest rates. Pro-government media presented the central bank action as an "intervention against the dollar", avoiding describing it as an interest-rate increase.

‘High time’

The president, who’s been running Turkey for 15 years, had come under growing pressure from some ministers and financial officials to allow a rate rise. He was due to begin a campaign for re-election on Thursday, as polls suggested he may face a tougher challenge than in past votes.

"It’s high time to restore monetary policy credibility and regain investor confidence," deputy prime minister Mehmet Simsek, Turkey’s top economy official in the cabinet, said on Twitter after Wednesday’s central-bank meeting. He expressed his support for the bank "in doing what’s necessary to stem the slide in the lira and achieve price stability".

The lira strengthened to 4.5677 per dollar at 8.04am in Istanbul on Thursday. It had fallen to a record 4.9253 on Wednesday, before closing 2% stronger following the central bank’s intervention. The lira’s collapse in 2018 has put many Turkish companies that borrowed in foreign currencies at risk of default.

The 300 basis-points increase on Wednesday "was the minimum", Ozlem Bayraktar Goksen, chief economist at Tacirler Securities in Istanbul, said after the decision.

"There will still be expectations for further rate hikes as consumer inflation accelerates due to recent lira weakness," she said. "There’s already been damage done to the economy."

Simple framework

The central bank’s rate-setting committee had not been scheduled to meet until June 7, and it had not communicated with markets for a week before Wednesday’s move.

The bank began forcing lenders into the previously little-used late liquidity window in January 2017. In November, it became the only source of cash for commercial banks.

The central bank refrains from calling any one of its multiple different interest rates a benchmark. Governor Murat Cetinkaya said in April that he may soon finalise a plan to simplify monetary policy. That would be likely to result in a framework more in line with global norms, with a single rate governing all central-bank funding to commercial lenders.