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

Lewis Collier
May 25, 2018

After the steps taken by the officials, the lira recovered to 4.55 against USA dollar and 5.33 against euro after the day's record lows of 4.92 and 5.74, respectively.

Higher rates can support a currency and ease inflation, but also hinder economic growth by making borrowing more expensive.

The lira had lost more than 20 percent of its value against the dollar since the year began.

The 300 basis points hike was largely in line with what economists said was needed and, in a hawkish statement, the central bank said it would continue to use "all instruments" to achieve price stability.

"It will rule Turkey after the elections.This is not something that would be resolved in a matter of days", he pointed out. He warned that "there is no limit to how far this could go because this is becoming a currency crisis".

"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.

The U.S. dollar gained around 26 percent against Turkish lira, nearly 24 percent against Argentine peso, almost 11 percent against Brazil real, more than 7 percent against Russian ruble and around 6 percent against Indian rupee.

Economy Minister Nihat Zeybekci said the lira's current level was "abnormal", but added that, as yet, no permanent damage had been done to the economy.

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While Turkish markets were closed at last check Wednesday, U.S. -listed ETFs like TUR serve as a real-time price discovery vehicle for investors. "If policymakers refrain from tightening monetary policy, the risk of a disorderly adjustment and a sharp economic downturn (possibly recession) will mount", he said.

Earlier in the day, Turkey's central bank hiked the late liquidity window lending rate to 16.5 percent from 13.5 percent as part of its efforts to stem the decline of Turkish lira against the USA dollar, which hit another historical low to 4.93 on Wednesday.

A similar measure was taken Wednesday morning by the Istanbul Stock Exchange which made a decision 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".

The currency has lost 22% of its value in 2018, as fears grow that the government might undermine the powers of Turkey's central bank.

Recep Tayyip Erdogan has previously described himself as an "enemy of interest rates".

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

Turkey's market jitters in part reflect a global trend in which the currencies of emerging economies have come under pressure.

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