In first hint of hike, Turkish Central Bank lifts rate on dollar reserves
ANKARA - Reuters
![In first hint of hike, Turkish Central Bank lifts rate on dollar reserves](http://image.hurimg.com/i/hurriyet/75/0x0/59c9415345d2a027e83d37d7.jpg)
The Central Bank will face a crucial credibility test when it meets for the last time this year on Dec. 22.
It has previously signaled that it would wait to take its cue from the U.S. Federal Reserve (Fed). Failure to follow the Fed’s lead - the Fed lifted rates on Dec. 16 - would exacerbate investor concerns about the bank’s independence in the face of pressure from President Recep Tayyip Erdoğan.
“This move is only symbolic to support markets, but it gives a signal that the Dec. 22 meeting may result in a policy rate hike,” a liquidity manager at an Istanbul bank said.
The Turkish Central Bank increased the interest rate on dollar-denominated required reserves, reserve options and free reserves held at the bank to 0.49 percent from 0.24 percent.
“As the market response to the Fed’s rate hike has been quite positive, we expect the bank to start implementing its previously released monetary policy normalization,” Odeabank said in a note to clients.
Erdoğan has equated high borrowing costs with treason. The president’s chief economic adviser, Yiğit Bulut, said late on Dec. 16 that markets would respond positively to the U.S. rate increase and it would be beneficial for Turkey to seek an opportunity to cut interest rates.
“There is a benefit to seek an opportunity to cut interest rates,” Bulut said on his Twitter account.
“A positive trend may be seen in markets in the 60 days ahead. The only development that could spoil this positive atmosphere is Russia and momentary upsets of the balance,” he added.
Economists have argued Turkey was long overdue for an interest rate rise to rein in inflation and put a floor under the Turkish Lira. The bank’s refusal to do so has helped send the currency to a series of record lows.
The Central Bank’s benchmark repo rate is set at 7.5 percent. Some market participants refer to the repo rate derisively as the “politicians’ rate,” as it does not reflect the true cost of borrowing.
That is better reflected by the weighted average cost of Central Bank funding, which hovers at around 8.80 percent.
The lira gained against the greenback after the Fed decision, trading at 2.93 by Dec. 17 afternoon, from 3.09 late on Dec. 16.