Turkish central bank should raise interest rates to avoid crisis - former officials

Turkey’s central bank should raise interest rates in order to avoid an economic crisis, former policymakers told Reuters in an article published on Friday.

The Turkish economy faces the dual threat of the COVID-19 pandemic and a historically low lira. But the bank has so far rejected orthodox economic responses in favour of selling foreign exchange to protect the value of the domestic currency.  

This must now change, starting with an interest rate rise at a meeting of the central bank next week, former officials, including past governor Bülent Gültekin, told Reuters,  

President Recep Tayyip Erdoğan has repeatedly opposed any hike in interest rates on moral terms and has favoured the use of cheap credit to expand the economy while relying on other instruments to try and control inflation.

But “these should not be a substitute for the fundamental instrument, the policy rate”, said the central bank’s former chief economist, Hakan Kara.

Analysts say that an increase in interest rates would also boost investor confidence by demonstrating the bank’s independence.

And without action, Turkey risks a balance of payments crisis, Moody’s ratings agency warned last week.

However, a rate rise remains unlikely. “The trend is going toward a one-man rule, so talking about central bank independence is absurd right now,” Gültekin said.