ANKARA: A massive rate hike may have stalled the Turkish lira’s fall and salvaged the central bank’s credibility, but it stunts growth at a politically fraught time for Prime Minister Tayyip Erdogan and may not shield Turkey from a fragile global backdrop for long.
The bank raised all its key interest rates in dramatic fashion at an emergency policy meeting late on Tuesday, ignoring opposition from Erdogan as it battled to defend the lira following its fall to a series of record lows.
The boldness of the actions stunned investors, propelling the lira to its biggest one-day gain in more than five years and stirring hopes it would short-circuit a vicious cycle of selling in emerging markets.
But gains of almost four percent on the day quickly faded in later trade yesterday as market focus switched to a later monetary policy decision by the US Federal Reserve.
Erdogan, keen to maintain growth ahead of an election cycle starting in two months, 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.
He has yet to react to the midnight rate hike.
But a senior government official, speaking on condition of anonymity, said the bank had made a tough but necessary call.
“The move will certainly have some consequences for the economy, namely a reduction in consumption, higher credit costs and secondly a lower growth rate,” the official said, adding the government’s four percent target this year looked in jeopardy.
Turkey’s economy grew an estimated 3.6 percent in 2013, but higher inflation and the withdrawal of cheap money by the US Fed have dented hopes of much of an improvement this year.
“Although there will be no immediate effect on politics, approaching elections with low growth will of course have a cost,” the official said.
The central bank had been struggling to contain the lira’s precipitous slide, with investor confidence damaged by a corruption scandal shaking the government and the global impact of the cut in US monetary stimulus.
Reluctant until now to make an outright hike, the bank instead tried to defend the currency by burning through forex reserves and trying to squeeze up borrowing costs on the margins before biting the bullet and tightening.
“Whatever happened yesterday, Turkey was facing a growth slowdown because it was living beyond its means. The tightening last night is not all negative. A loss of faith would have been more damaging,” said Neil Shearing, chief emerging markets economist at Capital Economics.
Finance Minister Mehmet Simsek played down the impact on growth saying the economy would have suffered greater damage if the credibility of the central bank had been undermined.
Reuters
