The Turkish lira is enjoying one of its best rallies in 2020 as the central bank raised interest rates and sent a message to financial markets that reforms were on the way. Soon after President Recep Tayyip Erdogan cleaned house in his ministry and at the central bank, investors have been placing their bets that Turkey will adopt orthodox fiscal and monetary policies. So far, so good.
On Thursday, Turkey’s central bank hiked its benchmark one-week repo rate by 475 basis points to 15% at its November policy meeting. This was the biggest rate hike in two years. The market had penciled in a rate increase of about 400 basis points. Policymakers revealed that monetary tightening would continue until a decline in inflation is accomplished, reversing the standard policy of slashing rates to spur economic growth.
The policy meeting was also noteworthy because it was the first one in the Naci Agbal era, the newly pointed head of the central bank.
The Committee has decided to implement a transparent and strong monetary tightening in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process.
Central bank officials said that central funding would be extended through the one-week repo rate. The institution agreed that this would be the primary policy tool and the main signal of its monetary stance.
According to the statement that was released following this month’s meeting, Committee officials are optimistic about the nation’s economic recovery, although it alluded to several uncertainties in the short-term outlook. With the resurgence in confirmed coronavirus cases, the country has resorted to another round of restrictions and public health guidelines.
Ziad Daoud, the chief emerging markets economist at Bloomberg Economics, is hopeful that Agbal has chosen to restore predictability after an entire year of back-and-forth decisions that sparked uncertainty in the Turkish economy and bearish sentiment in the lira.
Financial markets had high expectations for Naci Agbal, Turkeyâs new central bank governor, and he delivered. He restored predictability in monetary policy by re-instating the one-week repo rate as the main policy tool. He also bought some credibility with a hefty rate hike.
In another announcement from the central bank, foreign exchange reserves fell to $40.37 billion in the week ending November 13, down from $41.91 billion in the previous week. Forex reserves have been on a decline this year as the central bank has dwindled its holdings to prop up the lira. It remains to be seen if Agbal will maintain these efforts or attempt to increase reserves.
In other data, automobile production surges 14.1% year-over-year in October, up from 4.3% in September.
Despite flattening the curve this past spring, Ankara has witnessed a resurgence in COVID-19 cases this month, with new daily infections topping 4,000. In total, Turkey has reported 430,000 cases, with a death toll of nearly 12,000. The second wave is threatening the economic gains that the country has enjoyed in recent months.
The USD/TRY currency pair tumbled 1.9% to 7.5599, from an opening of 7.7059, at 18:43 GMT on Thursday. The EUR/TRY dropped 1.75% to 8.9765, from an opening of 9.1348.
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