Monday, November 19, 2018

Defying Erdogan, Turkey’s central bank raises interest rates

  • >>Liz Alderman and Prashant S Rao, The New York Times
    Published: 2018-09-14 11:38:26 BdST

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Acting to stem a currency crisis that has rattled markets worldwide, Turkey’s central bank sharply raised interest rates Thursday, defying a call by President Recep Tayyip Erdogan just hours earlier to lower borrowing costs.

The move, increasing Turkey’s benchmark interest rate to 24 percent from 17.75 percent, quickly pushed the Turkish lira up 3 percent against the dollar. The currency had dropped to record lows in August on investor concern that inflation was accelerating and that Erdogan was taking too active a role in the management of the economy.

The plunge in the lira — the currency has fallen nearly 40 percent against the dollar since the start of the year — was exacerbated by a series of diplomatic and trade disputes with the United States. The tumultuous period has served to expose the flaws in Turkey’s debt fuelled economic growth.

Authorities “are trying to grab back the initiative,” said Peter Dixon, an economist at Commerzbank. “Whether they’ll succeed or not is another matter.”

Turkey’s recent economic problems have been so stark that only drastic measures could stabilise the lira and reverse an eye-popping 18 percent surge in inflation, economists said. But Erdogan, who is widely seen as trying to influence the independent central bank, has signalled an unwillingness to allow even modest rate increases or curb government spending that has fuelled a popular growth boom — as well as runaway prices.

Hours before the central bank made its announcement, Erdogan said he valued the bank’s independence, before immediately taking another swipe at it. Speaking to the Confederation of Turkish Tradesmen in Ankara, he slammed interest rates as a “tool of exploitation,” adding: “I say, let’s drop these high interest rates. Interest is the cause, inflation is the result.”

Erdogan also signed a decree Thursday effectively imposing a ban on conducting business in Turkey using euros or dollars.

That made the decision to jack up interest rates even more of a surprise. Analysts said the move may at last help stabilise the lira and put a brake on inflation, while restoring the faith of investors in the central bank’s independence. But it could also set the bank up for a clash with Erdogan if higher borrowing costs begin to cool the rapid economic growth that he has sought to bolster his popular support.

In a statement announcing its move, the Turkish central bank said there were “upside risks” to inflation, despite “weaker domestic demand conditions.” It added that, as a result, it had “decided to implement a strong monetary tightening to support price stability.”

For nearly two decades, Turkey had uninterrupted growth that helped reduce poverty, increase the ranks of the middle class and, until recently, turned the nation into a darling of international investors.

But the growth was built chiefly on a construction boom fed by cheap credit and an avalanche of government spending that Erdogan poured into the economy to stimulate even more activity. That success story has become increasingly unsustainable.

On the ground, the plunge in the lira has had an impact on daily life in a litany of ways, affecting even the availability of pharmaceutical supplies. Major drug wholesalers in Turkey are running low on stocks, and soon many antibiotics, as well as drugs for oncology, as well as cardiovascular and neurological ailments, will fall out of date, according to Vedat Bulut, president of the Ankara Chamber of Pharmacists.

“Hundreds of thousands of people will be affected,” Bulut said. “Especially for cancer patients, a delay of even a few days in treatment may cause metastasis.”

The lira’s dizzying ups and downs have mirrored many of the challenges faced by emerging market currencies. As the Federal Reserve has begun increasing interest rates in the United States and as the European Central Bank looks to withdraw monetary stimulus of its own, investors have become less tolerant of the risks present in many smaller developing countries, and have begun pulling their cash. The South African rand has lost almost a fifth of its value since the start of the year, while the Indonesian rupiah has declined nearly 10 percent and the Indian rupee 13 percent in the same period.

The lira has since recovered many of its losses. At its weakest, in mid-August, 7.2 lira were required to buy $1, but at one point, Thursday the Turkish currency had strengthened to 6 against the dollar.

While Turkey remains a relatively minor economy in the global context — its annual output is about the same as that of a country like the Netherlands — several European banks have investments or subsidiaries there. That exposes the region to risks emanating from Turkey, even as the European Union grapples with its own challenges, including a trade dispute with the United States and concerns over slowing economic growth.

 

© 2018 New York Times News Service