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Turkey raises interest rates

24 July 2013

Turkey’s central bank raised interest rates on Tuesday for the first time in almost two years after the lira slumped to a record low this month.

The bank’s Monetary Policy Committee increased its overnight lending rate by 75 basis points to 7.25% on Tuesday and said it might tighten further.

The median estimate in a Bloomberg survey of 10 economists was that Turkey’s lending rate would rise to 7%.

Tuesday’s move sees Turkey join other emerging economies that are raising interest rates to support their currencies after a huge sell off.

The rate hike was flagged last week by Central Bank Governor Erdem Basci, who signalled that he would opt for a measured rate hike after the lira fell more than 7% to record lows against the dollar. The central bank has been forced to spend more than 10% of its net reserves since early June, selling more than $7 billion to shore up the currency.

The bank also said today that it would eliminate a 50 basis-point discount for primary dealers, the country’s biggest banks, on days when it offers funding only at the top end of the corridor. That would make the effective increase in costs for the main banks 125 basis points on those days.

The rate hike comes at an awkward time for Prime Minister Recep Tayyip Erdogan, who has repeatedly said that he wanted interest rates to stay low to boost economic growth which slowed to 2.2% last year from 8.8% in 2011.

The central bank said it will follow a “cautious” policy until inflation is in line with medium-term targets. Inflation accelerated to a nine-month high of 8.3 percent in June. The year-end inflation target is 5 percent.

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