Turkish central bank rate change boosts the lira

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Turkish central bank rate change boosts the lira

Turkish central bank rate change boosts the lira
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The Turkish lira has strengthened after the central bank raised one of its interest rates to support the currency.

Bank officials also said they would, if necessary, take further steps to stop the lira from falling.

The overnight lending rate was put up to 7.25 percent from 6.5 percent. Raising that rate increases the real interest rate on lira assets and makes them more attractive to foreign investors, supporting the currency. Whether that in itself will be enough remains to be seen.

The move was in response to capital outflows that have knocked the value of the lira down as much as nine percent against the dollar, despite attempts by the central bank to prop it up.

The lira has been weakened by uncertainty over the US Federal Reserve’s bond-buying stimulus programme and by widespread public demonstrations against the government last month.

The bank kept other rates – such as its one-week repo policy rate and its benchmark borrowing rate unchanged.

It is a major reversal by the central bank, which two weeks ago was railing against what it called the ‘interest rate lobby’ which it said was conspiring to manipulate interest rates.

At that time it steadfastly refused to use a shift in interest rates to support the lira.

Prime Minister Tayyip Erdogan has long championed low interest rates, fearing an economic slowdown ahead of elections, but the central bank has already burned through $6.6 billion (five billion euros) of its reserves to try and boost the lira, a policy it cannot pursue indefinitely.

Reassurances from Fed Chairman Ben Bernanke last week over the pace of the US central bank’s plans to withdraw monetary stimulus have boosted sentiment in emerging markets, lending support to the lira in recent days and taking some pressure off Turkey’s central bank.

It nonetheless followed other emerging markets in lifting rates. Last week, India joined Brazil and Indonesia in raising some of its interest rates to try to prevent a rout of its currency.