Turkey’s central bank raised its late liquidity window rate by 300 basis points to 16.5 per cent at an emergency meeting of its monetary committee on Wednesday to halt the lira’s slide. All other rates were kept the same.
Turkish President Recep Tayyip Erdogan, who is seeking re-election next month, has publicly opposed any moves to raise interest rates, arguing that high rates cause rather than curb inflation. He said this month that he intends to take more responsibility for monetary policy if he wins the June 24 election.
If Mr Erdogan wins, Turkey’s governance model will be transformed from a parliamentary system to an executive presidency.
The US economy is continuing to strengthen, which have left fewer investors interested in emerging markets, particularly those countries with current account deficits and/or high dollar-denominated debt. Argentina was forced to turn to the International Monetary Fund this month after drastic hikes in interest rates failed to halt the peso’s decline.
The lira had plummeted more than 5 per cent, nearing an unprecedented low of 5 per dollar, before the central bank’s rate decision, but ended the day more than 2 per cent firmer versus the dollar. The Turkish currency resumed its slide on Thursday, tumbling 2.7 per cent to 4.6970 per dollar.
A collapsing currency is increasing the debt burden for Turkish companies that hold large foreign currency denominated debts, putting them at risk of default.
The Turkish economy grew 7.4 per cent in 2017, faster than China. Investors complain that the economy is overheating as inflation has reached close to 11 per cent and the current account deficit, a broader measure of a nation’s imbalance in trade, is equal to about 6 per cent of gross domestic product as rising oil prices have inflated the imports bill.
Turkey’s low savings rate means that breakneck growth requires foreign financing, but the bulk of the cash coming in is in the form of short-term “hot money” flows into stocks and bonds, as opposed to desirable long-term investments in companies and factories.
Mr Erdogan’s fiscal plans will only worsen the current account deficit.
Photo: Harold Litwiler
