Turkey’s central bank faces a “dilemma” on interest rates as it weighs the slowdown since July’s failed coup, a weaker lira and inflation, Deputy Prime Minister Mehmet Simsek said.
“Clearly the economy is weak,” Simsek said in an interview with Bloomberg TV at the World Economic Forum in Davos, Switzerland, describing “so so” growth in the fourth quarter following a contraction in the third. “But it’s still a decision the central bank needs to be making on the basis of price stability as well as other macro financial stability considerations.”
Simsek also pointed out that the central bank has already delivered a “backdoor” tightening this month, after raising rates for the first time in almost three years in November. With the lira extending last year’s 17% decline and conventional tools having little impact, policy makers raised costs for commercial lenders this month by forcing them to borrow using a little-used interest rate. The central bank is also using swaps to help bolster the lira.
The lira’s decline was a “cause of concern” for policymakers, and measures are being taken to tackle that, Simsek said. “We were moving to a more orthodox policy, but then you have the recent volatility. So the central bank resorted back to some unorthodoxy.”
Analysts expect the Monetary Policy Committee led by Governor Murat Cetinkaya to revert to more conventional tightening at its next meeting on January 24 by raising two key lending rates, according to Bloomberg surveys.
The central bank has frequently come under pressure from politicians including President Recep Tayyip Erdogan to keep lending costs low in order to spur the economy. Those demands have come despite the bank missing its inflation target for six consecutive years. Consumer prices rose an annual 8.5% in 2016, well above the bank’s 5% target. The central bank has launched currency swap auctions as part of a series of extraordinary measures to try to support the lira.
The lira slumped to record lows against the dollar this year and policymakers have come under pressure from Erdogan to not raise interest rates to avoid hurting economic growth. Instead the central bank pushed up borrowing costs by tightening the supply of liras and this week started swap auctions to manage liquidity.