Turkish central bank raises interest rates to 15 percent; lira gains

Turkey’s central bank increased its benchmark interest rate to 15 percent. The lira extended a rally against the dollar.

Monetary policymakers hiked borrowing costs from 10.25 percent, the central bank said in a statement on Thursday. All funding to banks will be carried out at the benchmark rate, the central bank said, ending a policy of setting policy via a so-called interest rate corridor.

Investors in Turkey had bet on a substantial hike to Turkish interest rates after President Recep Tayyip Erdoğan, a vocal opponent of higher borrowing costs, sacked and replaced the central bank’s governor on Nov. 7. Erdoğan said last week that the bank had his backing to do battle against inflation, which reached 11.9 percent in October.

But Erdoğan said on Wednesday that high interest rates were costly and deterred investment and employment, raising questions about the size of the rate hike and monetary and economic policy going forward.

“The lagged effects of depreciation in Turkish lira, increasing international food prices and deterioration in inflation expectations affect the inflation outlook adversely,” the central bank said in a statement. “Accordingly, the Committee has decided to implement a transparent and strong monetary tightening.”

The central bank’s decision matched the median estimate of economists surveyed by Reuters, Bloomberg and the state-run Anadolu news agency.

The lira rose by 0.9 percent to 7.6367 per dollar.

The Turkish lira has rallied from an all-time low after Erdoğan hired Naci Ağbal, a respected technocrat and former finance minister, as central bank governor. It had hit a record low of 8.58 per dollar on Nov. 6, then gained by as much as 12 percent to the strongest level since late September ahead of Thursday’s decision.

"Excellent decision from Ağbal - at last Turkey has a proper central banker," said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London.

The lira has also rallied after the resignation of Berat Albayrak, Erdoğan’s son-in-law, as treasury and finance minister on Nov. 8. Erdoğan replaced Albayrak two days later with former deputy prime minister Lütfi Elvan.

Turkey's central bank has done the bare minimum in raising rates to 15 percent and must now focus on rebuilding its credibility in fighting inflation, said Eric Meyersson, senior economist at Swedish bank Handelsbanken.

"If there was a good time to exceed expectations that was today," he said. "Instead, the central bank has once again done the minimum expected and now starts the hard part: slowly building the track record of a commitment to inflation targeting."

(Story was updated with economist's comment in the final paragraph.)