By Ali Kucukgocmen and Can Sezer
ISTANBUL (Reuters) – Turkey’s central bank raises key interest rate by 518 basis points to % said on Thursday it would further reverse President Tayyip Erdogan’s policies, even as post-election austerity measures fell short of expectations and the lira fell.
At its first meeting under new governor Hafize Gaye Erkan, the bank reversed course after years of monetary easing, One week the repo rate has been cut from 2021 to 8.5% to 2021%% despite soaring inflation.
Analysts said the move suggested Erkan may have limited room to aggressively tackle inflation under Erdogan. The median estimate in a Reuters poll was for rates to rise to 21 percent.
Thirty minutes after the rate hike – Turkey’s first rate hike since year – Lira suddenly begins to plummet, touching 21 all-time low. 40 against USD.
The central bank’s policy committee said that tightening policy “will be further strengthened in a timely and gradual manner as needed until the inflation outlook improves significantly”.
Its tone was stronger than a month The former was more hawkish, saying that the rate hike “is to establish a deflationary course as soon as possible, stabilize inflation expectations, and control economic deterioration.” Pricing behavior.”
Annual inflation rate in May hit 40 and slightly below 40% yearly high above last October’s 40%. Inflation will come under further pressure, the central bank said.
The central bank added that it would gradually “simplify and refine the existing micro- and macro-prudential framework” to improve market institutions and stability – a sign some of the dozens of initiatives were late Regulations passed since then may be reversed, freeing up credit, foreign exchange and debt markets.
Limited wiggle room
A senior Turkish official said the rate hike was partly aimed at avoiding excessive market volatility and showing determination to tighten policy , adding that strong strides will continue in the future.
Erdogan has pushed for rate cuts over the past two years, triggering a late currency crisis and triggering price increases. Despite the central bank’s efforts to use its foreign exchange reserves to meet foreign exchange demand.
After winning elections last month, Erdogan signaled he was ready to compromise on economic policy, appointing highly regarded Mehmet Simsek as finance minister , and named former Wall Street banker Erkan as Treasury secretary. Served as the governor of the central bank.
Erdogan said last week he had approved the measures Simsek would take, suggesting he had given the green light for a rate hike.
Piotr Matys, senior FX analyst at InTouch Capital Markets, said the policy decision could show that “Erkann has limited leeway to restore monetary policy orthodoxy.”
“One could argue that it will take time to restore shattered confidence, but if President Erkann wants investors to believe that she is in charge of monetary policy, not President Erdogan, then more than expected will be more efficient,” he added.
A majority of economists in a Reuters poll expect further rate hikes this year, with the median year-end forecast at 21 %. The central bank’s key interest rate is still lower than the deposit rate as high as 40%, and the real interest rate is still negative.
Bank net reserves fell to a record low of minus $5.7 billion last month before rebounding as Ankara eased its grip on the foreign exchange market this month. The lira has lost 15% so far this year.
Turkey’s credit default swaps (CDS), the cost of insuring its debt, rose by 21 bps to Basis points after raising interest rates less than expected.
Some analysts have cast doubt on Erdogan’s commitment to ditching unorthodox policies, citing examples of his previous shift to orthodox policies only to quickly change his mind .
Authorities want foreign investors and hard currency to return after years of outflows, potentially reducing the need for central bank intervention to keep the lira stable.