Turkish Prime Minister Recep Tayyip Erdogan called on the Central Bank on April 4 to cut interest rates. Erdogan had made a similar demand some four months ago, while alleging the existence of an “interest rate lobby,” but his wish never materialized. To the contrary, the Central Bank was forced to announce massive hikes of 4 to 5.5 base points in overnight borrowing and one-week repo rates. The bank raised the rates after the Turkish lira fell sharply against the dollar, hit by corruption allegations, the threat of political chaos ahead of elections and a move by the US Federal Reserve to put the brakes on bond buying. Foreign investors began exiting the Turkish market, lured back to the United States by rising interest rates. Erdogan reacted by asserting that he would “tolerate this for some time.”
The record hike calmed financial markets to a certain extent, with the lira rebounding from about 2.3 to 2.17 against the dollar. Lingering tensions ahead of the March 30 local elections then led to the lira fluctuating back in the 2.21-to-2.25 range. The yields on bank deposits, meanwhile, rose from 7-8% to 11%.
