(Bloomberg) -- Turkey’s central bank raised its top interest rate at an emergency meeting on Wednesday, bowing to pressure from financial markets after the government’s rejection of higher borrowing costs plunged the nation into a currency crisis.
The central bank raised its late liquidity window rate by 300 basis points to 16.5 percent, after an extraordinary meeting of its monetary policy committee on Wednesday. It kept other rates unchanged, describing the move as a “powerful monetary tightening” and saying it’s ready to continue using all instruments. The lira reversed losses after early plunging as much as 5.5 percent to a record low.
The central bank acted after three weeks of turmoil on Turkey’s currency markets. Turkish President Recep Tayyip Erdogan, who’s seeking re-election next month, has publicly opposed any moves to raise interest rates, while investors and economists argued that was the only way to halt the rout.
In a televised address after Wednesday’s move, Erdogan didn’t specifically mention the rate increase, but he sought to reassure investors by pledging allegiance to global principles on monetary policy. He had told Bloomberg in an interview this month in London that he’ll seek more control over monetary policy if he wins the June 24 vote.
‘High Time’
The president, who’s been running Turkey for 15 years, had come under growing pressure from some ministers and financial officials to allow a rate increase. He’s due to kick off a campaign for re-election on Thursday, as polls suggest he may face a tougher challenge than in past votes. He’ll also speak to state-run TRT in an interview at 11 p.m. Turkish time on Wednesday.
“It’s high time to restore monetary policy credibility & regain investor confidence,” Deputy Prime Minister Mehmet Simsek, Turkey’s top economy official in cabinet, said on Twitter after Wednesday’s central-bank meeting. He expressed his support for the bank “in doing what’s necessary to stem the slide in lira & achieve price stability.”
The lira gained 2.2 percent to 4.5672 per dollar at 10 p.m. in Istanbul. It earlier fell as much as 5.5 percent. The lira’s collapse this year has put many Turkish companies that borrowed in foreign currencies at risk of default.
The 300 basis-point increase on Wednesday “was the minimum,” Ozlem Bayraktar Goksen, chief economist at Tacirler Securities in Istanbul, said after the decision.
“There will still be expectations for further rate hikes as consumer inflation accelerates due to recent lira weakness,” she said. “There’s already been damage done to the economy.”
Simple Framework
The central bank’s rate-setting committee hadn’t been scheduled to meet until June 7, and it hadn’t communicated with markets for a week before Wednesday’s move.
The bank began forcing lenders into the previously little-used late liquidity window in January 2017. In November that year, it became the only source of cash for commercial banks.
The central bank refrains from calling any one of its multiple different interest rates a benchmark. Governor Murat Cetinkaya said in April that he may soon finalize a plan to simplify monetary policy. That would likely result in a framework more in line with global norms, with a single rate governing all central-bank funding to commercial lenders.
(Updates with speech by President Erdogan from fourth paragraph.)