The Turkish central bank raised its benchmark repo rate by 125 basis points on Thursday to 17.75 per cent.
The decision came three days after an inflation report from the Turkish Statistical Institute showed consumer prices rose 12.15 per cent in May from a year earlier, a marked pick-up from the 10.85 per cent year-on-year increase in April. Inflation was fuelled by a slump in the lira and the jump in oil prices.
A combination of a stronger dollar and rising US bond yields, high inflation, widening budget and current account deficits spurred a flight from lira assets in May. The Turkish central bank stepped in to arrest the lira’s decline by first raising its late-liquidity window by 300 basis points at an unscheduled meeting (the late liquidity window allows banks to borrow after local markets have closed), and then announcing a decision to simplify its system of interest rates, setting the one-week repurchase rate as the new benchmark. The emergency interest-rate increase, however, didn’t halt the currency’s slide.
The lira has weakened about 18 percent against the dollar this year. The depreciation feeds into prices, mainly through the cost of imported goods.
Turkey’s private sector holds foreign currency loans totalling nearly $300 billion. The plunging lira has made it more expensive for firms with revenues predominantly in lira to service their foreign currency debt.
Turkey’s vulnerability is compounded by parliamentary and presidential elections that were pulled forward by President Recep Tayyip Erdogan, who remains Turkey’s most popular politician, by almost a year-and-a-half.
The June 24 elections will cap Turkey’s transition from a parliamentary democracy to a powerful executive presidency. The president will have the power to issue decrees with the force of law, prepare the budget subject to parliament’s approval, dissolve parliament on the condition that new elections be held for the presidency and parliament simultaneously and appoint high-level officials. The change was approved in a narrowly won referendum last year.
Mr Erdogan, who is a longstanding opponent of high interest rates, told Bloomberg TV last month that he intends to take greater control of economic management if he wins the elections.
Turkey’s economy is highly dependent on borrowing foreign money to finance its growth (last year’s 7.4 per cent gross domestic product growth was fuelled by fiscal stimulus the government pumped into the economy). Most of that funding comes from “hot money” flows, which can move very quickly in and out of markets.
Photo: Harold Litwiler
