Turkey hikes interest rate for first time since 2018

The lira gained around one percent in value against the US dollar within minutes of the announcement. (File/AFP)
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Updated 24 September 2020

Turkey hikes interest rate for first time since 2018

  • The bank said the one-week repo rate would go from 8.25 percent to 10.25 percent
  • The coronavirus pandemic has forced nations worldwide to cut rates to revive their stalled economies

ANKARA: Turkey’s central bank raised Thursday its main interest rate for the first time since September 2018, boosting it by two percentage points to haul the lira up from historic lows.
The bank said the one-week repo rate would go from 8.25 percent to 10.25 percent.
The lira gained around one percent in value against the US dollar within minutes of the announcement, after touching a record low of 7.71 earlier in the day.
“Massive surprise, and positive,” said Timothy Ash, an analyst at BlueBay Asset Management.
The coronavirus pandemic has forced nations worldwide to cut rates to revive their stalled economies.
But Turkey has been burning through its hard currency reserves to support the lira, which has lost nearly 22 percent of its value against the dollar this year and is one of the world’s worst performing emerging market currencies.
The Moody’s ratings agency estimated on Monday that Turkey’s hard currency reserves were now at a 20-year low.
A central bank statement said it “decided to increase the policy rate by 200 basis points to restore the disinflation process and support price stability.”
Inflation edged up to 11.77 percent in August from 11.76 percent in July but it has remained stubbornly in the double digits in the past few years.
This means that Turkey is running a negative real interest rate, where bank deposits and bonds lose value over time, forcing investors out of the market and Turkish nationals to convert their liras into dollars or euros.
The bank last increased its main rate in September 2018 from 17.75 percent to 24 percent owing to a currency crisis caused by tense relations with the United States.
But President Recep Tayyip Erdogan opposes high rates, once describing them as “the mother and father of all evil,” and called for them to be lowered to stimulate growth.
Erdogan last year sacked the bank’s governor and appointed Murat Uysal, under whose direction the rate has been cut nine times.
Ash said the rate decision “suggests the (bank) listened to the market and decided they had to move to avoid a disorderly devaluation and potential balance of payments crisis.”
“They are not out of the woods yet, but they have given themselves a fighting chance.”


Researchers say new model shows Turkish inflation well above official tally

Updated 22 October 2020

Researchers say new model shows Turkish inflation well above official tally

  • Since last year, opposition lawmakers have raised questions about the accuracy of official inflation data
  • Year-on-year inflation was 11.75% according to the official tally announced earlier this month

ISTANBUL: Turkish monthly inflation was more than triple the official rate in September, according to a new model developed by a group of academics and researchers based on more frequent data than the government statistics office.
Veysel Ulusoy, a professor at an Istanbul-based university and head of the independent Inflation Research Group (ENAG), said the model collects “several times more” price data than the official Turkish Statistical Institute (TUIK) tally, and is meant to complement it.
Since last year, opposition lawmakers have raised questions about the accuracy of official inflation data, arguing that the published rate was lower than the market realities.
According to ENAG’s first published finding, consumer prices in September rose 3.61% from the previous month, compared to TUIK’s calculation of 0.97% increase.
Year-on-year inflation was 11.75% according to the official tally announced earlier this month. ENAG has not yet published a year-on-year figure.
TUIK was not immediately available for comment.
“We observed price differences and volatility in almost all groups in the basket,” Ulusoy said in an interview. ENAG brings together academics from multiple Turkish universities.
“TUIK collects 550,000 prices for all the basket items in a month. ENAG calculations include several times more than that, constructing a richer set of data,” Ulusoy said.
Turkish annual inflation has remained in double digits this year despite a sharp economic contraction in the second quarter due to the coronavirus pandemic. High prices and a record low lira prompted the central bank to raise interest rates last month, and it is expected to hike again on Thursday.
The ENAG model can calculate inflation as frequently as every hour, meaning it can fill gaps for researchers and investors, Ulusoy said. It weighs items in the same way as TUIK, but excludes price data from health, education spending and alcoholic drinks.
The September calculation showed that school-related items had the most price spikes including computers, tablets and mobile phones, as well as children’s’ clothing and some agricultural goods.
Ulusoy said the ENAG model showed that tablets and computer prices were up more than 30% in September from August due to school reopenings, while TUIK put these items at around 4% month-on-month.
Last year opposition parties submitted parliamentary questions to Finance Minister Berat Albayrak over claims that TUIK tweaked inflation data for political reasons, claims dismissed as groundless by the head of the institute.