Rate hike spared Turkey's credibility, threat to growth limited: Finance minister

Rate hike spared Turkey's credibility, threat to growth limited: Finance minister

ISTANBUL - Reuters
Rate hike spared Turkeys credibility, threat to growth limited: Finance minister

Finance Minister Mehmet Şimşek praised the Central Bank's decision, despite PM Erdoğan's opposition to a rate hike. AA photo

Turkish Finance Minister Mehmet Şimşek played down the impact on growth of a sharp hike in interest rates on Jan. 29, saying the economy would have suffered greater damage from a loss of faith in the Central Bank. 

The bank raised all its key interest rates in dramatic fashion at an emergency policy meeting late on Jan. 28, despite the opposition from Prime Minister Recep Tayyip Erdoğan as it battles to defend the crumbling lira currency. 

The hike sent the lira higher and driving a broad revival in global risk appetite, but it raised the prospect of Turkey missing its four percent growth target this year, something Erdoğan has been keen to avoid with an election cycle starting in two months. 

"If we don't preserve credibility, growth would lose ground on a much bigger scale, it would weaken much more rapidly," Şimşek told Turkish broadcaster NTV when asked about the midnight rate hike announcement. 

"There has been a rapid comeback in the exchange rate, which is an indicator of regaining credibility," he said. 

The lira strengthened to 2.18 to the dollar in the immediate aftermath of the rate hike, a sharp rise from the record low of 2.39 it hit on Monday. It pared some of its gains by 1030 GMT however, trading at 2.21. 

The cost of insuring Turkish debt fell to a three-week low, according to data from Markit. Erdoğan has been a vociferous opponent of higher borrowing costs, railing against what he describes as an "interest rate lobby" of speculators seeking to stifle growth and undermine the economy. Hours before the Central Bank's decision he reiterated that he was opposed to interest rate hikes. 

His stance had left the Central Bank struggling to contain the lira's precipitous slide, with investor confidence damaged by a corruption scandal shaking the government and the global impact of a cut in U.S. monetary stimulus. 

"The impact of the rate hike on growth would certainly be negative. However, without a hike the lira was in freefall. That would hurt economic activity much more," said Mehmet Besimoğlu, chief economist at Oyak Securities.