Central Bank's rate boost to Turkish Lira fizzles out

Central Bank's rate boost to Turkish Lira fizzles out

ANKARA - Agence France-Presse
Central Banks rate boost to Turkish Lira fizzles out

The Turkish decision was closely watched in emerging markets. REUTERS photo

Crisis action by the Turkish Central Bank doubling its key interest rates gave only brief relief to the lira which fell back as emerging markets faced a U.S. monetary policy decision on Jan. 29.

The Turkish decision was closely watched in emerging markets where the South African Central Bank followed with a half-point rise in its key rate.

The Turkish bank defied political pressure to double its key interest rate to 10.0 percent to attract funds and fight a run on the currency.

The increase was also a pre-emptive move against any tightening of U.S. monetary policy, which could suck money out of emerging economies.

The lira leapt by about 3.0 percent overnight in response to the Central Bank's U-turn. But during trading on Jan. 29, the lira lost its gains. Before the decision it stood at 2.25 to the dollar, it then shot up to 2.17, but later was down to 2.3.

But it was still well above the record low of 2.39 to the dollar it reached at one point on Jan. 27. The lira also slipped to 3.11 to the euro compared with 3.09 before the decision.

The Istanbul stock exchange lost by 3.75 percent to 61,162.35 points.

Asian stocks rose on Jan. 27, with the Turkish bank providing a shot of confidence amid turmoil in emerging markets. European stocks also rose, but fell back as the time approached for the U.S. Federal Reserve central bank to say later if it will reduce further its huge stimulus to the U.S. economy.

Analysts say policymakers in other emerging economies were closely watch the effects of the Turkish move.

South Africa's Reserve Bank followed Turkey by raising its main interest rate by 50 basis points to 5.5 percent, amid sustained pressure on the rand and rising inflation.

'Bold stance'

The change of Turkish policy set the Central Bank in direct opposition with Prime Minister Recep Tayyip Erdoğan, already under pressure over a high-level corruption scandal.

Only hours before the decision Erdoğan warned that the bank would be responsible for any ensuing slowdown in growth.

But the bank went ahead, increasing its overnight lending rate to 12 percent from 7.75 percent, the overnight borrowing rate from 3.5 percent to 8.0 percent, and the pivotal one-week repo rate to 10.0 percent from 4.5 percent.

Charles Movit, economist at IHS Global Insight, said the Central Bank opted for a "bold stance" that should convince the markets but warned that the political uncertainties over the sweeping corruption probe, coupled with global turmoil, could threaten the lira.

"The evolving political situation or volatility in global capital markets could undermine the lira again despite the central bank's new-found independence," he said.

The currencies of emerging economies have taken a severe beating recently, due in part to U.S. Federal Reserve policy reducing stimulus measures. This tends to suck cash out of emerging markets back to the United States.

The lira has fallen by about 10 percent since mid-December, when a corruption controversy became public. On Jan. 28, the Central Bank of India announced a surprise decision to raise its key rate by a quarter of a point to 8.0 percent. Among other emerging countries in currency turmoil are Argentina and Russia.

The Fed tapering "hits countries that tend to fund their deficits with short term money flows like Turkey," said Kathleen Brooks, research director at Forex.com.

Brooks listed Turkey among those countries with shaky economic fundamentals, particularly current account deficits, along with India, Indonesia, South Africa and Thailand.

Finance Minister Mehmet Simsek praised the Central Bank's decision.  "If they made such a decision, I am sure it is the best one," he told Turkish television, adding that the bank's credibility was "critical".

Erdoğan's government wants rates held down to sustain growth ahead of an election cycle beginning with March local polls.