Turkish central bank raises interest rates for the first time in two years

The entity is trying to halt the fall in the value of the lira
Archival photograph of the Governor of the Central Bank of the Republic of Turkey (CBRT), Murat Uysal, presenting the Inflation Report at a press conference in Ankara on 31 July 2019

AFP/ADEM ALTAN  -   Archival photograph of the Governor of the Central Bank of the Republic of Turkey (CBRT), Murat Uysal, presenting the Inflation Report at a press conference in Ankara on 31 July 2019

The Central Bank of Turkey has announced a rise in interest rates for the first time in two years. In view of the continued loss of value of the lira, the national currency, the monetary authorities have decided to increase rates from 8.25% to 10.25%. The entity has pointed out that this move is aimed at tackling the inflation that is taking place due to the state aid that has been put in place during the coronavirus pandemic and a renewed growth in imports deferred by the health crisis, according to a statement available on its website.

Tipo de cambio
AFP/OZAN KOSE - Screen showing exchange rates at an exchange bureau near the Grand Bazaar in Istanbul on 24 September 2020

Since the beginning of the year, inflation has hovered around 11% to 12%, a level slightly above the average of the last decade. This Tuesday's rate increase is the first after two years of consecutive cuts, which began in the summer of 2018. The high interest rates then managed to stabilise the lira at an average value of 6.5 lire per euro. But since March the value of the currency has returned to a dynamic of continuous devaluation and has even accumulated losses of 28% of its value in seven months. This Thursday, for the first time in the history of this currency, each lira was exchanged at 9 units per euro and 7.7 per dollar. The currency has reacted positively to the Central Bank's announcement, recovering 1.3% of its value against the dollar and 1.1% against the euro.  

A delicate moment for the currency 

The lack of foreign currency in the Central Bank and the increase in inflation have been putting downward pressure on the Turkish lira for weeks.  The monetary authority, which has spent tens of billions of dollars of its foreign currency reserves in support of the lira, has now been forced to abandon the policy of lowering interest rates in order to boost economic activity in the country.  

Banco Central de Turquía
REUTERS/UMIT BEKTAS - Entrance of the bank's headquarters in Ankara (Turkey)

The central bank has been losing currency for four months now in order to shore up the currency and protect it from the swings of the markets. Although this policy has prevented the historical collapse of the currency, it has managed to avoid a further fall in its value. The difficulty of receiving external financing remains one of Turkey's main weaknesses, as Fitch pointed out in a report this summer. "The fall in foreign exchange reserves since the end of February, coupled with the weak credibility of monetary policy and negative real interest rates, increase the risks of further external pressures," the document states. Fitch analysts already announced in that document that the lack of foreign currency would force interest rates to be raised and debt to be issued. The health crisis has also hit tourism, one of the most important sectors for the country's economy, hard.