Turkey’s central bank has unexpectedly raised its key interest rate as the country continues to try and reign in soaring inflation.
The Central Bank of Turkey said on Thursday that it had raised the policy rate (or one-week repo auction rate) to 50%, up from 45%, due to higher-than-expected inflation in February.
“While imports of consumption goods and gold slowed down and contributed to the improvement in the current account balance, other recent indicators imply that domestic demand remains resilient,” the bank said in a press release. “Stickiness in services inflation, inflation expectations, geopolitical risks, and food prices keep inflation pressures alive.”
While the rate hike was necessary and unexpected, but welcome, Turkey’s economic travails are by no means over. More needs to be done in terms of establishing a rule based economic policy, and monetary and fiscal tightening.
Yet, the road will become easier to travel, if global fund managers suspended disbelief in Erdogan’s erratic policies and begin to invest into Turkish markets. Has a single rate hike convinced them?
For Timothy Ash, an emerging markets strategist at BlueBay Asset Management, the rate rise shows a dedication to tackling inflation and should reassure investors of the central bank’s independence. Expectations were heavily slanted toward a rate hold ahead of local elections in Turkey due to take place on March 31.
“Note the narrative had been that the CBRT could not hike before local elections as Erdogan had not given them the green light. This move shows that Simsek and the CBRT have been given a strong mandate to do whatever it takes to fight inflation,” Ash said, referencing Turkish Finance Minister Mehmet Simsek. “They are proving their independence now.”
The rate hike – which outstripped virtually all forecasts – “stunned the market,” said Piotr Matys, senior FX analyst at In Touch Capital Markets in London.
“Today’s decision is a very strong signal that Governor (Fatih) Karahan, who took over from (Hafize Gaye) Erkan when she unexpectedly resigned, is determined to bring staggeringly high inflation under control,” he said.
“You can read into this (rate hike) that Simsek and the central bank have the capacity to be more aggressive, upcoming election or not,” said Peter Kisler, EM portfolio manager at Trium Capital in London.
It’s a big move, and it will lead to a stabilization in lira exchange rates over the remainder of the year.” said Peter Kinsella, the global head of FX strategy at Union Bancaire Privee in London. “It also shows the market that it can still move following the departure of the former governor and that the senior authorities are still wedded to an orthodox policy approach”, said Gordon Bowers, analyst at Columbia Threadneedle Investments.
“Now assuming CBRT Governor survives in his post until Saturday morning, I think foreign portfolio flows will soon be returning to Turkey”, commented Guillaume Tresca, global EM strategist at Generali Investments, accordibng to Bloomberg.
“Given that the lira has been under persistent selling pressure ahead of the local elections scheduled for March 31, at least some investors may interpret today’s decision as an emergency rate hike to keep the Turkish currency stable in the coming weeks”, added Kieran Curtis, investment director at Abrdn.
“I am quite surprised that the political economy allowed it. It’s clearly the correct decision from a policy perspective with inflation going up again recently in response to higher wages and also further reserve losses recently”, said Batuhan Ozsahin, chief investment officer at Ata Investment.
“Pretty hawkish. Highly positive” stated Tufan Comert, director of global markets strategy at BBVA. “This would help negative expectations to dissipate regarding Mehmet Simsek’s position after the elections. It will clearly ease the burden on the CBRT’s shoulders”.
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