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Turkey raises interest rates for first time in 3 years to buoy lira

November 25, 2016 at 4:10 pm

Turkey’s central bank announced yesterday that it had raised the benchmark weekly repo rate by 50 basis points in order to end the decline in the price of the lira.

The Monetary Policy Committee of the bank said it decided to raise the interest rate to 8 per cent from 7.5 per cent in the first move of its kind since early 2014, and apparently in direct contradiction of the wishes of President Recep Tayyip Erdogan.

The lira lost 10 per cent of its value against the USD this month due to growing doubts surrounding the growth of the Turkish economy and fears of instability due to a series of terrorist attacks.

The doubts are also triggered by Ankara’s tense relations with the EU and the US that have only worsened since the failed coup attempt, which Turkey blames on the Hizmet Movement headed by Fethullah Gulen.

Gulen has lived in self-imposed exile in the United States for many years, and he and his movement are now considered terrorists by his home country. The US’ refusal to hand him over to Turkey has soured relations.

Although the central bank is technically independent, its decision was made after a number of high-level political meetings regarding economic policy, including a meeting held in Erdogan’s presidential palace on Wednesday.

The bank explained its decision by noting that the exchange rate movements due to recently heightened global uncertainty and volatility posed upside risks on the outlook for inflation.

Inflation reached 7.16 per cent in October, which is much higher than the 5 per cent goal set by the bank.

Erdogan has always pushed for keeping the interest rates low in order to motivate growth, and encourage businesses to take loans.

The lira was pressured before the decision in what markets considered to be a critical test of Turkey’s central bank’s ability to resist political pressures to follow an expansive monetary policy.

The lira regained some of the value it lost immediately after the decision was announced, gaining 0.74 per cent against the USD yesterday.