Erdogan warns over dangers of higher interest rates

Struggling Turkish lira makes a comeback after interest rates rise

Erdogan's repeated calls for lower rates and his dismissal of two central bank chiefs since mid-2019 have raised concerns about political interference in monetary policy. The prior finance minister, who reportedly quit due to health reasons, was President Erdogan's son-in-law Berat Albayrak.

The interest rate decision is interpreted as a fundamental change in the previous policy of the central bank to keep the key interest rate as low as possible. The Turkish currency, which had lost almost a third of its value against the US dollar this year, has risen about 12% since the economic leadership reshuffle.

Ehsan Khoman, head of Mideast and north Africa research and strategy at Japanese bank MUFG, said the bank had needed to "wow markets, restore credibility and predictability" and had done "exactly that".

"The Committee has chose to implement a transparent and strong monetary tightening in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process", the bank said in a statement.

Under his predecessor Murat Uysal, the central bank had already raised the rate by 2 percentage points to 10.25 percent in July and otherwise tightened the banks' money supply through the use of other monetary policy instruments, so that there was already talk of interest rate hikes through the back door in the markets to push real interest rates out of negative territory.

The rate hike, which was in line with the expectations of the economists surveyed by Bloomberg, means that the one-week repo rate is slightly higher than the average interest rate the central bank has been charging for funding the Turkish financial system in recent weeks.

The increase "doesn't seem like much, given what was at stake", said Jason Tuvey, a leading emerging market economist with Capital Economics, the consulting firm.

The new central bank governor Naci Agbal justified the decision after the first meeting he chaired with the fight against inflation.

"Of course Erdogan's tendency to intervene will not go away".

Wolfango Piccoli, co-president of London-based Teneo Intelligence, said 2020 had shown that Turkey's model of economic development - largely based on easy credit - was no longer sustainable and was well past its expiry date. He said the record of Mr. Erdogan, who is notorious for meddling with the central bank, could quickly "revert to his standard level, pumping credit ahead of schedule, accelerating inflation and depressing inflation [lira] once again".



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