Turkey’s lira bounces as central bank finally raises interest rates

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People walk past a sign offering customers a 10TL gift if they exchange more than $1,000 or euro at a currency exchange store on December 5, 2016, in Istanbul.

Turkey’s lira made gains on Wednesday after the country’s central bank raised interest rates for the first time this year in an effort to counter ballooning inflation.

In a policy directed by Turkish President Recep Erdogan, central bank interest rates had been kept low to fuel gross domestic product (GDP) growth in the country of nearly 80 million, which led the G-20 at 7.4 percent in 2017.

But prioritizing growth to this extent has come at the expense of inflation, which currently sits at a lofty 10.2 percent.

Erdogan has aggressively pushed his controversial policy, openly calling himself an “enemy of interest rates” and long keeping the Central Bank of the Republic of Turkey’s (TCMB) hands tied, according to some analysts.

Markets were relieved at the central bank’s decision Wednesday, which hiked its rate by 75 basis points to 13.5 percent. Subsequently, the lira — billed as one of the worst emerging market currencies so far this year — strengthened by 1 percent to 4.0475 on the dollar on Wednesday afternoon. The previous week saw it hit an all-time low of 4.1944 against the dollar; it had depreciated 13.9 percent since August.

The TCMB announced that it would continue to tighten policy as needed. Speaking at the International Monetary Fund (IMF) meetings this month, Turkish Deputy Prime Minister Mehmet Simsek described bringing inflation down to the single-digits as a government priority.

“The market was primed for a sell-off if the (central bank) had failed to hike,” said Timothy Ash, senior emerging markets strategist at Bluebay Asset Management, who described the bank’s decision as doing the “right thing” in a difficult political setting.