Turkish central bank responds

» Central bank raises reference rate for emergency liquidity by 300 basis points to 16.5%. Lira gains uplift following the announcement.

» Political representatives, including President Erdogan and Prime Minister Yildirim, also tried yesterday to counter the sell-off of the lira.

» So far, however, the central bank has failed to lastingly stabilise the currency. Further steps may be necessary.

The Turkish central bank left itself plenty of time, but yesterday it finally reacted in an emergency meeting to the sharp fall of its national currency in recent weeks. The lira has lost about 15% against Europe’s single currency since the beginning of May alone. Ahead of the meeting, it weakened up against the US dollar by as much as 18%. With its decision to raise the reference rate for emergency liquidity, the de facto key interest rate, by 300 bp to 16.5%, the central bank succeeded in raising the exchange rate of its national currency by as much as 6% last night.

Not only the Central Bank but also political representatives recently made statements in support of the lira. President Erdogan announced that, after the elections on 24 June, the government would observe the monetary policy guidelines generally applicable worldwide. A spokesman for the President stressed that further steps would be taken to strengthen the lira, and Prime Minister Yildirim underscored Turkey’s intention to remain an open market in the future. The political representatives are apparently trying to dispel any contrary impressions that might have been gained in recent weeks.

Politicians and the central bank managed after all to pull together in the last few hours. But this does not seem to be sufficient to ensure a sustained recovery of the lira. Even this morning, the national currency had already forfeited around half of yesterday’s gains. Some observers consider the recent interest rate increase to be inadequate, with the question of the central bank’s independence evidently more decisive now than the actual level of interest rates. Yesterday’s meeting was clearly insufficient to signal a clear strategy in support of a monetary policy geared primarily to price stability. Moreover, following the election campaign statements of President Erdogan, considerable uncertainty still remains as to what will happen in Turkey after the presidential and parliamentary elections have been held.

It is particularly important that the Turkish central bank endeavours to win back trust. It took a first step in this direction yesterday. The next meeting of the central bank is scheduled for 7 June. If the generally prevailing sentiment with regard to emerging market currencies does not brighten up in the near future, further confidence-building measures may become necessary.


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