Turkey Hikes Main Interest Rate to 17%

Turkey's central bank on Thursday hiked its main interest rate to 17 percent in what economists greeted as a sign that the financially troubled country was embracing monetary orthodoxy once again.

The decision means that Turkey's policy rate has shot up by 6.75 percentage points in just a month -- a stark contrast to many countries' decisions to bring borrowing costs down to help revive economies badly hit by the coronavirus pandemic.

The sharp move higher follows two years in which it was held steady or lowered due to President Recep Tayyip Erdogan's unconventional belief that higher rates cause inflation.

That policy saw the Turkish lira lose roughly a third of its value against the dollar as the central bank burned through its reserves in an effort to prop up the currency.

The accompanying rise in the annual inflation rate to above 10 percent forced Erdogan to reshuffle his economic team and appoint market-friendly former finance minister Naci Agbal as central bank chief last month.

The lira managed to claw back about 10 percent against the dollar after the change on market expectations that traditional monetary policy was returning to Turkey.

"Today's meeting will provide further reassurance to investors that the shift to orthodoxy is here to stay," Capital Economics analyst Jason Tuvey said in a research note.

"We think that the (central bank) has probably now done enough and expect the one-week repo rate to be kept at 17 percent for at least the next six months or so." 

The lira gained nearly one percent in value and was trading at around 7.57 against the dollar about an hour after the rate decision.

- End to intervention -

The statement issued after Agbal's second monthly central bank policy meeting Thursday focused heavily on fighting inflation.

The central bank now expects inflation to rise to above 14 percent this year -- the highest in Europe.

The bank "has decided to implement a strong monetary tightening, in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process as soon as possible," it said in a statement.

"In the forthcoming period, tightness of the monetary policy stance will be decisively sustained until strong indicators point to a permanent fall in inflation in line with the targets and to price stability," it added.

Agbal this month set an annual inflation target of 9.4 percent by the end of 2021. The government's ultimate goal is to bring inflation down to five percent by the time Erdogan faces re-election in 2023.

He also pledged to gradually build up the central bank's reserves and stop intervening in the market to target foreign exchange rates.