A clerk displays a selection of 50 Turkish lira banknotes at a currency exchange bureau in this photo in Turkey. (Photographer: Kostas Tsironis/Bloomberg)

Erdogan Surrenders to Market as Emergency Hike Supports Lira

(Bloomberg) -- Turkey’s central bank raised interest rates at an emergency meeting on Wednesday and President Recep Tayyip Erdogan pledged allegiance to global principles on monetary policy, bowing to pressure from financial markets after plunging the nation into a currency crisis.

The central bank raised its late liquidity window rate by 300 basis points to 16.5 percent, after an extraordinary meeting of its monetary policy committee. It kept other rates unchanged, describing the move as a “powerful monetary tightening” and saying it’s ready to continue using all instruments. The lira reversed losses after earlier plunging as much as 5.2 percent to a record low. It was still 17 percent weaker than at the start of the year.

The central bank acted after three weeks of largely self-inflicted turmoil in Turkish markets. Erdogan, who’s seeking re-election as president next month, has repeatedly opposed any moves to raise interest rates, referring to them as “the mother of all evil," while investors and economists argued that was the only way to halt the rout.

In a televised address after Wednesday’s move, Erdogan didn’t specifically mention the rate increase, but he sought to reassure investors by saying Turkey would follow global principles on monetary policy. He had told Bloomberg in an interview this month in London that high interest rates cause inflation -- the opposite of what the vast majority of economists believe -- and that he’d seek more control over monetary policy if he wins the June 24 vote.

In a more than hour-long interview with state-run TRT TV that ran past midnight on Thursday, Erdogan wasn’t asked about the economy, the lira or interest rates. Pro-government media presented the central bank action as an “intervention against the dollar," avoiding describing it as an interest-rate increase.

‘High Time’

The president, who’s been running Turkey for 15 years, had come under growing pressure from some ministers and financial officials to allow a rate rise. He’s due to kick off a campaign for re-election on Thursday, as polls suggest he may face a tougher challenge than in past votes.

“It’s high time to restore monetary policy credibility & regain investor confidence,” Deputy Prime Minister Mehmet Simsek, Turkey’s top economy official in cabinet, said on Twitter after Wednesday’s central-bank meeting. He expressed his support for the bank “in doing what’s necessary to stem the slide in lira & achieve price stability.”

The currency gained 2 percent at the close after the central bank’s intervention, but the rebound was temporary. It declined as much as 3.5 percent on Thursday, the most in emerging markets. The lira’s collapse this year has put many Turkish companies that borrowed in foreign currencies at risk of default.

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The 300 basis-point increase on Wednesday “was the minimum,” Ozlem Bayraktar Goksen, chief economist at Tacirler Securities in Istanbul, said after the decision.

“There will still be expectations for further rate hikes as consumer inflation accelerates due to recent lira weakness,” she said. “There’s already been damage done to the economy.”

Simple Framework

The central bank’s rate-setting committee hadn’t been scheduled to meet until June 7. It hadn’t communicated with markets for about week before Wednesday’s move.

What Our Economists Say
“The move provided short-term relief with the lira reversing its losses today, but it fails to address the underlying problem -- the direction in which President Recep Tayyip Erdogan is taking the country. For the lira to stage a bigger revival it would take another larger movement in rates, at the very least.”

--Jamie Murray and Ziad Daoud, Bloomberg Economics

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The bank began forcing lenders into the previously little-used late liquidity window in January 2017. In November that year, it became the only source of cash for commercial banks.

The central bank refrains from calling any one of its multiple different interest rates a benchmark. Governor Murat Cetinkaya said in April that he may soon finalize a plan to simplify monetary policy. That would likely result in a framework more in line with global norms, with a single rate governing all central-bank funding to commercial lenders.

©2018 Bloomberg L.P.