Turkey Central Banker Tightens Again in Boost to Credibility


Turkey’s central bank governor delivered another meaty interest-rate hike, bolstering credibility with investors after he pledged to tighten policy when needed to keep prices in check.

The Monetary Policy Committee led by Governor Naci Agbal lifted the one-week repo rate to 17% from 15% on Thursday, beating the 150-basis-points hike predicted in a Bloomberg survey of 25 analysts.

The lira extended gains against the dollar and was trading 0.9% higher at 7.5779 per dollar at 2:40 p.m. in Istanbul. The Borsa Istanbul 100 Index of equities rose as much as 0.8% after the decision.

Turkey Central Banker Tightens Again in Boost to Credibility

The bank pledged in its rates decision to maintain a tight stance until it sees “a permanent fall in inflation,” citing risks from a weak lira, domestic demand and commodity prices including food costs.

“It was good for the Turkish central bank to provide a slightly stronger push to rates than the consensus was expecting,” said Cristian Maggio, head of emerging markets at TD Securities in London. “It shows that the central bank is getting serious about inflation. They are not doing the bare minimum.”

Installed last month, Agbal inherited double-digit inflation, a declining lira and depleted foreign-currency reserves after his predecessor spurred a period of rapid credit growth by keeping interest rates low, urged on by President Recep Tayyip Erdogan, whose unorthodox economic views blame higher borrowing costs for fanning inflation.

Turkey Central Banker Tightens Again in Boost to Credibility

Although Agbal’s first move, increasing the benchmark by the most in over two years to 15%, was in line with estimates and managed to stabilize the lira, the actual tightening in monetary stance was somewhat symbolic. In effect, it brought the benchmark rate to around the central bank’s average cost of funding at the time.

Critically, though, his first step as governor also ended a complex rate-corridor structure criticized for its use of multiple rates and lack of transparency, moving Turkey to a more orthodox framework where all funding is provided through the benchmark.

Subsequent data releases illustrated why investors wanted to see more. Inflation in November climbed more than expected as the lira’s depreciation filtered through to prices, cutting the real interest rate by more than half to about one percentage point and curbing the lira’s appeal as a carry trade.

And Turks have remained reluctant to convert their savings to liras, so foreign-currency deposits continued to rise in December.

Turkey Central Banker Tightens Again in Boost to Credibility

The new governor sent hawkish signals as recently as last week when he pledged to tighten monetary policy when warranted by price developments and to increase the bank’s holdings of foreign assets without derailing the lira.

So far, investors and economists have welcomed Agbal’s stewardship of monetary policy.

The latest hike will force banks to raise lira deposit rates, reducing local investors’ demand for dollars, said Onur Ilgen, the head of treasury at MUFG Bank Turkey in Istanbul. “The central bank did the right think by getting ahead of market expectations.”

©2020 Bloomberg L.P.

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