Turkish Central Bank moves to stop lira’s fall

Turkish Central Bank moves to stop lira’s fall

ANKARA
Turkish Central Bank moves to stop lira’s fall

Turkey’s Central Bank sharply raised its key lending rate after markets closed on May 23 in a bid to stem an outflow of capital from the country, control inflation and support the beleaguered currency.

The Turkish Lira regained some of its value after the bank’s monetary policy committee held an emergency meeting and announced it was raising the rate from 13.5 percent to 16.5 percent, but the fluctuation of the value of the lira against the U.S. dollar continued for another day, swinging between an initial fall to 4.58 per dollar late on March 23 and nearly 4.80 per dollar on May 24.

“Current elevated levels of inflation and inflation expectations continue to pose risks on pricing behavior,” the Central Bank said in a statement.

“Accordingly, the committee decided to implement a strong monetary tightening to support price stability,” it added.

Turkish inflation reached 10.85 percent and the economy has been plagued by fears of overheating despite impressive growth.

The next scheduled meeting of Turkey’s Central Bank had not been due until June 7 but economists had said an emergency — and substantial — rate hike by the Central Bank is not only on the cards, but essential.

The 300-basis point 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.

“A tight stance in monetary policy will be maintained decisively until the inflation outlook displays a significant improvement,” it added.

The rate increase came despite President Recep Tayyip Erdoğan’s former insistence that rates be kept low.

Higher rates can support a currency and ease inflation. But they also tend to hinder economic growth by making it costlier to borrow and can arouse public discontent.

The lira had lost more than 20 percent of its value against the dollar since the year began. Concerns had grown that imports would become more expensive for the Turkish people. A lower-valued currency can also lead investors to pull their money out of a country if they expect the value of their investments to drop as the currency weakens.

Erdoğan, speaking at a Ramadan fast-breaking dinner late on May 23, said the weak Turkish currency did not reflect the state of the country’s economy.

“The partial volatility in the currency is certainly not consistent with the economic realities of Turkey,” he said, pointing to Turkey’s 7.4 percent growth rate and other indicators. “The volatility in the exchange rate is not just about our country; it’s a global problem.”

Erdoğan said Turkey had the means to stem the currency fluctuation, and he vowed to adopt new measures after the June 24 polls to stem inflation and the nation’s current account deficit. The current account is the broadest measure of trade, covering not only the movement of goods and services but also investment flows.

Erdoğan’s spokesman İbrahim Kalın said on March 24 that state bodies including the Central Bank are working to solve the “unnatural” fluctuations in foreign exchange.In an interview with Best FM radio, he said there are many factors contributing to foreign exchange volatility.

“The Turkish economy is strong. If it was weak, it would have collapsed immediately after the July 15 coup attempt,” he said, referring to the 2016 coup bid.

He added that Turkey will jump-start a new system after the June 24 elections to accelerate economic growth, and improve politics, security, and employment.

Turkey’s market jitters in part reflect a global trend in which the currencies of emerging economies have come under pressure. Economists say that is partly because the U.S. Federal Reserve is steadily raising rates, thereby encouraging investors to shift their money into higher-yielding investments in the United States.

Earlier on May 23, Deputy Prime Minister Bekir Bozdağ cast the lira’s drop as a foreign plot to harm Erdoğan and distort the results of the polls.

Muharrem İnce, the main opposition Republican People’s Party (CHP) candidate challenging Erdoğan in the June 24 presidential race, called on the leader to stop interfering in the Central Bank’s monetary policy and to ease concerns over fiscal discipline, warning that the “economy is about to hit the wall.”

Central Bank, Liras, interest rate, Economy, Turkey