Turkey's rate hike increases concern over financial stability

At midnight Jan. 28, members of Turkey’s Central Bank Monetary Board gathered for an emergency meeting — three weeks earlier than their scheduled gathering — and decided to aggressively increase a series of short-term interest rates, including the repo rate, which went from 7.75% to 12%. The goal was to bolster the weakening Turkish lira against the US dollar.

However, the Central Bank’s interference in the markets has not yielded the intended outcome. While the Turkish lira strengthened to 2.1636 against the dollar, from 2.25 earlier the same day, the markets closed on Jan. 31 at 2.2710 liras against the dollar.    

“It didn’t take the market long to realize that the Turkish Central Bank did not over-deliver on any account at its emergency meeting compared to expectations,” Abbas Ameli-Renani, an emerging markets analyst at Royal Bank of Scotland in London, told Al-Monitor. “The actual rate hike was in line with consensus, despite the headlines, and the Turkish Central Bank did not deliver a meaningful simplification of its monetary policy framework compared to what it was until just two weeks ago.” 

Ameli-Renani added, “The Turkish Central Bank’s decision at the emergency meeting was not politically smart. In my view, they should have just hiked the lending rate and left the repo rate unchanged. The market would have accepted this as a hike, whilst [Turkish Prime Minister Recep Tayyip] Erdogan would have been able to sell the decision to [ordinary people on the street] as 'no change,' given the repo rate was commonly referred to as the policy rate. That could have been win-win. But the decision of the Central Bank … was 'at best' a win-lose for Central Bank-Erdogan, and of course, Erdogan won’t react kindly to a loss, especially given this price action. … [This] decision will likely add a new front to the political unrest.”