Turkey's new-look central bank 'decisively' hikes rates by 475 basis points

  • Move comes after President Tayyip Erdogan installed a new governor,pledging a more market-friendly economic approach.
  • The rate hike could support the lira after a series of record lows, but could also slow an economic recovery from coronavirus fallout.

Turkey's central bank aggressively raised its policy rate by 475 basis points to 15% on Thursday, meeting lofty expectations after President Tayyip Erdogan installed a new governor and pledged a more
market-friendly economic approach.

The lira rallied nearly 1% after the bank's policy committee said its "transparent and strong" tightening step would lower double-digit inflation, reverse a harmful dollarization trend and help it rebuild depleted foreign
reserves.

"The tightness of monetary policy will be decisively sustained until a permanent fall in inflation is achieved," the committee said after a policy meeting.

The rate hike was the sharpest in more than two years and could support the lira after a series of record lows, though it could also slow an economic recovery from coronavirus fallout.

In response, the currency firmed to 7.635 against the dollar, from around 7.71 beforehand.

The bank raised its key one-week repo rate from 10.25% where it has stood since September. The uppermost rate in its policy framework, the late liquidity window, was set at 19.5%, up from 14.75%.

The lira – hit by concerns over the thin FX buffer and Turks snapping up hard currencies to record levels – rallied some 12% last week after Naci Agbal was named the central bank's new chief and the finance minister, Erdogan's son-in-law, abruptly resigned.

Erdogan has long blamed high rates for causing inflation and held foreign investors responsible for the economy's woes.

But after the surprise overhaul last week he said even "bitter" policies would be adopted as he promised a new era of economic stability that welcomes foreign investors under the new leadership.

All 21 economists in a Reuters poll expected a rate hike with the median at 475 basis points and predictions ranging from 200 to 575 points.

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