News ID: 176399
Published: 0816 GMT January 25, 2017

Turkey’s interest rate moves leave country in a mess

Turkey’s interest rate moves leave country in a mess

“Yes, it looks like a mess,” said Turkey’s Deputy Prime Minister Mehmet Simsek last week of his country’s image in the eyes of investors and foreign politicians in an early contender for Understatement of The Year. The latest interest rate decision from the country’s central bank will do little to turn that around.

The central bank opted to leave its benchmark interest rate on hold on Tuesday, stunning economists who had predicted a rise of anywhere between a quarter and a full percentage point, and sending the lira plunging, albeit briefly, according to FT.

The central bank did not stand still entirely, raising the overnight lending rate by 0.75 percentage points and pledging more tightening in future if “inflation expectations, pricing behavior and other factors affecting inflation” warrant it.

Still, the decision to leave the key rate on hold in spite of the lira’s record-breaking plunge was, to put it diplomatically, brave. The currency is the worst performer of the year so far, down by more than six percent against the dollar. Labeling lira sellers as terrorists and railing against the evils of higher interest rates, as President Recep Tayyip Erdogan has done, is unlikely to calm investors’ nerves. Some fear that the mixture of grim domestic politics, a collapse in tourism and the prospect of more tightening from the Fed could be on the brink of getting out of hand.

Simsek argues that a little patience will pay off, that the current ‘rough patch’ will clear. Once the controversial referendum on reforming the role of the president is out of the way later this year, the country can get back to, as he puts it, ‘factory settings’ — not perfection, but more familiar, reliable territory at least. His voice carries some weight. As a one-time finance minister and banker, he is viewed as a rare voice of calm for Turkish markets.

Those calm voices generally prevail, eventually at least, when it comes to economic and monetary policy. But the central bank’s decision again to shy away from the obvious salve to the lira’s woes suggests that President Erdogan’s inner circle isn’t listening at this point. The longer that lasts, the more sour the required medicine will be, and, ironically, the more President Erdogan will balk at swallowing it.

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