Turkey raises interest rate by most in two years to 15%

Turkey has announced its biggest interest rate rise in more than two years as it signalled a change of direction after a drastic shake-up in the country’s economic management.

In the first rate-setting meeting chaired by new central bank governor Naci Agbal, the bank moved to tame inflation and bolster the Turkish lira by lifting its benchmark one-week repo rate by 4.75 percentage points to 15 per cent.

The lira jumped almost 3 per cent against the dollar immediately after the decision, before trimming its gains to 1.9 per cent, or TL7.56. Turkey’s currency is still down 22 per cent since the end of last year.

The lira suffered months of record lows before the shock resignation of President Recep Tayyip Erdogan’s son-in-law Berat Albayrak as finance minister 10 days ago. Investors’ concerns about Turkey’s economic policies and the economic fallout from the coronavirus pandemic have combined to pile pressure on the currency.

Thursday’s decision will be seen by many investors as evidence that Mr Erdogan, a staunch opponent of high interest rates, has given the incoming central bank governor a mandate to act — at least in the short term — to stabilise the currency and could tempt a much-needed wave of foreign capital back into Turkish markets.

The increase, which was in line with the expectations of economists surveyed by Bloomberg, takes the one-week repo rate to slightly higher than the average interest rate that the central bank had been charging to supply funding to the Turkish financial system in recent weeks.

It had been using a complicated system of multiple rates that appeared to aim to tighten monetary conditions without incurring the wrath of the president, and had in effect brought the cost of funding provided by the bank to 14.8 per cent by Wednesday.

The central bank announced that it had decided to provide all funding through the one-week repo rate, a move likely to be welcomed by investors as a sign that it is returning to a more conventional approach to monetary policy.

With additional reporting by Adam Samson in London

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