Turkey Surprises With Bigger Rate Hike to Bolster Lira
(Bloomberg) -- Turkey’s central bank raised interest rates for the first time this year, lending support to the lira as it seeks to contain inflation in the weeks leading up to early presidential elections in June.
Policy makers increased the late liquidity window, the rate it uses to set bank funding costs, by 75 basis points to 13.50 percent, surpassing the median estimate in a Bloomberg survey for a 50 basis-point move. The lira, which has fallen against all major currencies this year, strengthened 1 percent by 4.0475 per dollar by 2:02 p.m. in Istanbul.
Turkey is struggling to tame inflation after the weakening lira pushed price growth as high as 13 percent last year. While it’s since fallen to 10.2 percent in March, it’s still double the official target of 5 percent.
Central bank Governor Murat Cetinkaya said on the weekend that he’d increase borrowing costs “if needed” to anchor the currency, which has the potential to swing in the weeks leading up to June 24 elections. President Recep Tayyip Erdogan has periodically insisted lower rates are needed to spur the economy and boost lending, fueling concern that his tightening grip on power will give him more room to influence monetary policy.
Last week, he called for nationwide elections more than a year earlier than scheduled to consolidate his one-man rule. A win will mean Erdogan can complete the transformation of the political system agreed in a referendum a year ago, including eliminating the prime minister’s job and weakening the role of parliament.
In its decision on Wednesday, the central bank said it would deliver further tightening if needed. It kept the one-week repurchase, overnight lending and borrowing rates unchanged, in line with expectations.
Turkey’s Deputy Prime Minister Mehmet Simsek, speaking in Washington last week, said bringing inflation to single-digit levels was a key government priority. While inflation is mainly driven by the weak currency, new limits on borrowing in foreign currency should also reduce the lira’s volatility, he said.
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