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Turkey raises interest rates again in bid to rebuild credibility - Financial Times

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Turkey has raised interest rates for a second month in a row as the country’s new central bank chief pushes on with a drive to rebuild its shattered credibility.

The bank’s monetary policy committee, headed by new governor Naci Agbal, announced on Thursday that it would lift its main interest rate from 15 per cent to 17 per cent — its highest level in more than a year.

The increase was bigger than the median expectation among economists of a 1.5 percentage point rise, according to a Bloomberg survey. It is likely to be welcomed by foreign investors as a sign that Mr Agbal, who was appointed last month, has been granted room for manoeuvre by president Recep Tayyip Erdogan, a notorious opponent of high rates. 

“Governor Naci Agbal is making good strides in rebuilding the central bank’s battered credibility and unwinding the damaging policy decisions of the past,” said Jason Tuvey, senior emerging markets economist at the consultancy Capital Economics.

The lira gained around 0.8 per cent following the decision, reaching 7.57 to the dollar.

In a statement, the central bank said it had decided to implement “strong monetary tightening” in order to bring down inflation as soon as possible. Annual price growth is running at almost three times the bank’s official 5 per cent target, according to November’s data.

Turkey’s tightening cycle is rare, as other central banks have cut rates this year in a bid to support their economies from the fallout from the coronavirus pandemic.

But analysts had long warned that rate rises were needed after an expansion of credit by Turkey’s banks put heavy pressure on the country’s currency. The lira has plunged through a succession of record lows from August this year and pushed the country to the brink of a full-blown financial crisis.

Mr Erdogan, who in recent years regularly pressured the central bank to lower interest rates, performed a dramatic about-turn last month when he sacked the previous central bank governor and appointed Mr Agbal in his place.

The shake-up also triggered the departure of his son-in-law, Berat Albayrak, who resigned as Treasury and finance minister after two-year stint marred by crises and a failed currency intervention that severely depleted Turkey’s foreign currency reserves.

Mr Agbal, a former bureaucrat and member of parliament in the ruling party, has set about trying to repair the central bank’s reputation.

In his first rate-setting meeting last month he raised the bank’s main rate by 4.75 percentage points to 15 per cent. The move was largely symbolic because it did little to change the actual cost of funding. 

Thursday’s decision builds on that move, leaving the real interest rate at 3 per cent when taking into account annual inflation, which was 14 per cent in November.

The central bank’s abrupt change of direction has helped to lure back international investors, who had staged an exodus from Turkish assets this year. Foreign investors bought almost $4bn in Turkish stocks and bonds in the six weeks to December 18, according to data released on Thursday.

But it will be more challenging to rebuild the confidence of sceptical Turkish investors, analysts said.

High inflation, low deposit rates and currency volatility have driven locals towards foreign currency and gold, exacerbating the pressure on the lira.

The trend had continued even in recent weeks because of a “lack of confidence” in the central bank’s policies among Turkish savers and investors, according to Enver Erkan, an economist at Istanbul-based Tera Investments.

Mr Erkan said that Thursday’s move could help to turn sentiment, while cautioning that it would take time. “When locals feel less inflation they will act differently and move into Turkish lira deposits from [foreign exchange] deposits,” he said.

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Turkey raises interest rates again in bid to rebuild credibility - Financial Times
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