(Bloomberg) – The new governor of Turkey’s central bank has raised the benchmark interest rate as expected, boldly acting on his pro-market messages and ending a period of stealthy tightening.
The monetary policy committee headed by Governor Naci Agbal rose on Thursday to 15% from 10.25%, as expected by most analysts polled by Bloomberg. The central bank said all funding will be provided through the main policy rate.
The rally as much as 2.5% after the decision. It was trading 1.7% stronger at 7.5765 to the dollar by 2:07 pm in Istanbul.
“The Committee decided to implement transparent and strong monetary tightening in order to eliminate the risks to the inflation outlook, to contain inflation expectations and to restore the disinflation process,” said the central bank in a press release.
The ruling suggests that unlike his recent predecessors, Agbal – appointed this month as part of a sweeping overhaul of Turkey’s economic policymakers – has President Recep Tayyip Erdogan’s backing for a more orthodox effort to protect the lira and curb inflation.
After long championing the theory that high interest rates cause rather than curb inflation, the president pledged to back his new economic managers with pro-market policies following the currency’s decline to historically low levels.
Agbal inherited a complicated funding structure from his predecessor Murat Uysal, who relied on a tightening of the backdoor using fringe tools.
Uysal’s approach took the average cost of financing to 14.8% on Wednesday, from less than half that level in July. But even supported by unannounced interventions by government lenders in foreign exchange markets using central bank reserves, it failed to stem the lira’s collapse.
With double-digit inflation for much of this year, the real interest rate was negative. The currency performed the worst among its emerging market peers in 2020 until Agbal’s appointment on November 7 and the resignation of the president’s son-in-law as economy minister soon after.
The statement said the monetary authority will only use its one-week repo rate to finance commercial banks, a step towards a more predictable policy. Economists have suggested that the central bank abandon the less transparent approach brought back in August.
Shortly before taking an oath with great authority in 2018, Erdogan vowed to take control of monetary policy to implement his unorthodox views on interest rates and prices. Turkish markets were steadily hammered over the next two years.
Last week, with the lira being well above 8 to the dollar, he changed tack, sparking optimism. Turkey will allow interest rates to rise to provide sufficient inflation-adjusted yield.
“Like everywhere else in the world, in our country, it is the central bank’s responsibility to determine and implement the policies necessary to curb inflation,” Erdogan told lawmakers in his AK party.
(Updates with central bank comments beginning in second paragraph)
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