Turkey to raise rates to calm currency crisis

ISTANBUL: The Turkish Central Bank is expected to raise interest rates on Thursday to calm a currency crisis, but forecasts for the scale of the increase vary widely as the bank balances concerns over lira weakness with worries about an economic slowdown.
The lira has slumped 40 per cent against the dollar this year, weakened by unease over President Tayyip Erdogan’s influence on monetary policy and more recently a bitter row with the United States that has unsettled investors.
The central bank confounded expectations for a rate increase at its July meeting, fuelling the belief it is under pressure from Erdogan, who has called interest rates the “mother and father of all evil” and frequently urges they be kept low.
But after inflation surged in August to its highest in nearly 15 years, the central bank that it would take action against “significant risks” to price stability — a rare move to soothe financial markets.
It said its monetary stance will be adjusted at Thursday’s policy committee meeting. Analysts saw this as pointing to an increase in the benchmark one-week repo rate, now 17.75 per cent — less than the annual inflation rate of 17.9 per cent.
Phoenix Kalen, strategist at Societe Generale, forecast the repo rate would be raised to 20.75 per cent and would be restored as the main policy instrument, after a period during which the effective funding rate has been 19.25 per cent.
“Although this amount of monetary tightening may disappoint market expectations and spark renewed TRY weakness, the decision would reflect the prioritisation of Turkish authorities’ concerns regarding a rapidly decelerating economy,” Kalen said. Turkey’s economic growth slowed to 5.2 per cent in the second quarter, data showed this week, and the economy is expected to slow again in the second half.— Reuters