Turkey’s central bank under pressure to hike rates amid plunging lira
Turkey’s central bank meets today for its monthly monetary policy review—the first since the re-election of President Recep Tayyip Erdogan.
Mr Erdogan’s re-election comes with expanded executive powers to appoint the bank’s rate-setters. This at a time when the world’s 17th largest economy struggles with a plunging currency—the lira has fallen 20% against the US dollar since January. Rising inflation and ongoing questions about Turkey’s current account deficit will continue to take the shine off last quarters bumper growth figures.
Three rate increases in the past two months have helped stabilise the lira and capital outflows in the short-term but have added a degree of volatility to Turkey’s reliance on international markets for funding. Erdogan’s personal commitment to addressing “structural problems” and interest rates he views as unfairly high will inject further uncertainty into the country’s economic and political situation.
Rising inflation and consumer prices are likely to force the central bank into hiking rates once again, with the additional possibility of continued intervention in foreign exchange markets to stabilise the lira’s decline. With Turkey’s new presidential system formalising many new and existing powers, investors look set to lose a great degree of certainty that the Bank of Turkey once guaranteed.
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