Turkey surprises with rate increase
Lira jumps on news; policymakers remain stuck between a rock and a hard place amid debt woes
The Turkish Central Bank surprised markets on Thursday with a 1.25% rate increase in its repurchase rate to 17.75%, sending the lira up sharply.
The currency, which briefly touched 5.0 to the US dollar in May, recovered to 4.46 before declining again to 4.49. President Tayyip Recep Erdogan had inveighed against high interest rates during the current election campaign, and most analysts did not expect the central bank to ignore the Turkish strongman’s warnings before the June 20 elections.
Turkey is running a current account deficit equal to 6% of GDP, and has already built up US$300 billion in foreign corporate debt. As the lira depreciates, Turkish businesses have to pay more to service their debt.
There are two ways to address these unsustainable circumstances. One is to choke off imports by raising interest rates and cutting off credit to businesses, and the other is to let the lira fall to a level that would convince foreign investors to buy Turkish assets. Both approaches are painful, and Turkey appears to have chosen to do some of both.