Turkish central bank raises rates sharply to prop up lira

President Erdogan has said he wants to take more control of the country’s economy (AFP)
Updated 24 May 2018

Turkish central bank raises rates sharply to prop up lira

  • Turkey's central bank announces a sharp hike in interest rates to boost the embattled lira
  • The bank said after an emergency meeting of its monetary policy committee it was raising the late liquidity window (LLW) lending rate from 13.5 percent to 16.5 percent

ANKARA: Turkish President Recep Tayyip Erdogan is facing a potentially severe crisis just a month ahead of elections over the sharp depreciation of the lira which risks buffeting his campaign and even influencing voters.
In an indication of the severity of the situation, the central bank hiked one of its key interest rates 300 basis points (bps) after an emergency meeting on Wednesday, after inaction for days amid Erdogan’s opposition to rate rises.
Erdogan has always painted himself as a champion of the Turkish economy, pointing to how growth and investment have expanded under his rule after the misery of Turkey’s 2000-2001 financial crisis.
But the lira’s depreciation by nearly 19 percent against the US dollar since the snap polls were called on April 18 may signal the economy could be a burden, rather than a boost, for Erdogan.
The Turkish strongman, a doughty campaigner and so far undefeated at the ballot box in any poll, has been strangely reticent in this campaign although his team emphasises his rallies will get fully under way on Saturday.
And when he speaks to the crowds in town squares nationwide, Erdogan will have to now confront people’s fears that the external value of the money in their pocket is crumbling.
“For Turks, a weak currency translates into a weak economy, so it’s difficult to see how this will not hurt Erdogan and the AKP (ruling party) even though their voter base is fairly loyal,” said Atilla Yesilada, country adviser at Global Source Partners in Istanbul, said.
Although the country was the fastest growing in the G20 in 2017, recording 7.4 percent growth, concerns remain over the economy overheating, the widening current account deficit and double-digit inflation. Inflation is currently at 10.85 percent.
Erdogan himself has spooked the markets by saying he plans a greater say in monetary policy — despite the nominal independence of the central bank — after the polls.
The central bank move to raise the late liquidity window (LLW) lending rate from 13.5 percent to 16.5 percent prompted a sharp rally in the value of the lira.
Even though the June 24 polls come at a time of strains with the West and the Turkish army is fresh from a successful operation inside Syria, pollsters’ surveys show the economy is the issue of most concern to Turks.
In polling done earlier this month by Ankara-based MAK Consultancy, 45 percent of 5,400 respondents told researchers the country’s most significant issue was the economy.
Another survey last month by Gezici pollster found 48.6 percent said economic woes were Turkey’s biggest issue.
And Turks’ faith in their economy is falling: the consumer confidence index dropped by 2.8 percentage points in May to 69.9 from 71.9 in April, according to the Turkish statistics office on Wednesday.
“Globally, it is shown that the economic performance has an immediate impact on voting behavior. Hence, the sizeable economic costs may have an impact on voting behavior,” Selva Demiralp, associate professor of economics at Koc University in Istanbul, told AFP.
She warned it was “hard to predict how the economy will evolve in the near future.”
Yesilada added: “If this exchange rate shock translates into weaker economic performance they will lose some more votes and the spectre of AKP losing power could become a reality in a fair election.”
Analysts have long said Erdogan’s administration has been split between pro-market pragmatists like Deputy Prime Minister Mehmet Simsek, a former Merrill Lynch strategist, and advisers known for outlandish statements such as Yigit Bulut.
The central bank’s decision ended days of suspense on the markets over whether it would raise rates after Erdogan called for lower rates to boost growth.
“It’s high time to restore monetary policy credibility and regain investor confidence,” Simsek said on Twitter after the bank’s move.
“The Central Bank governor and members of the monetary policy committee have my full backing in doing what’s necessary to stem the slide in lira and achieve price stability,” he added.
Erdogan has often blamed outsiders for economic problems in Turkey, railing against unnamed actors trying to wage “economic terror” against the country.
Deputy Prime Minister Bekir Bozdag on Wednesday said voters were aware of the games being played.
“They are deluded if they think they can change the outcome of the election by playing with the dollar,” Bozdag said.


Analysts urge Canada to focus on boosting the economy

Updated 06 July 2020

Analysts urge Canada to focus on boosting the economy

  • Canada lost one of its coveted triple-A ratings in June when Fitch downgraded it for the first time

TORONTO: Canada should focus on boosting economic growth after getting pummeled by the COVID-19 crisis, analysts say, even as concerns about the sustainability of its debt are growing, with Fitch downgrading the nation’s rating just over a week ago.

Canadian Finance Minister Bill Morneau will deliver a “fiscal snapshot” on Wednesday that will outline the current balance sheet and may give an idea of the money the government is setting aside for the future.

As the economy recovers, some fiscal support measures, which are expected to boost the budget deficit sharply, could be wound down and replaced by incentives meant to get people back to work and measures to boost economic growth, economists said.

“The only solution to these large deficits is growth, so we need a transition to a pro-growth agenda,” said Craig Wright, chief economist at Royal Bank of Canada. The IMF expects Canada’s economy to contract by 8.4 percent this year. Ottawa is already rolling out more than C$150 billion in direct economic aid, including payments to workers impacted by COVID-19.

Further stimulus measures could include a green growth strategy, as well as spending on infrastructure, including smart infrastructure, economists said. Smart infrastructure makes use of digital technology.

“We have to make sure that government spending is calibrated to the economy of the future rather than the economy of the past,” Wright said.

Canada lost one of its coveted triple-A ratings in June when Fitch downgraded it for the first time, citing the billions of dollars in emergency aid Ottawa has spent to help bridge the downturn caused by COVID-19 shutdowns.

Standard & Poor’s, Moody’s and DBRS still give Canadian debt the highest rating. At DBRS, Michael Heydt, the lead sovereign analyst on Canada, says his concern is about potential structural damage to the economy if the slowdown lingers too long.

Fiscal policymakers “need to be confident that there is a recovery underway before they start talking about (debt) consolidation,” Heydt said.

Fitch expects Canada’s total government debt will rise to 115.1 percent of GDP in 2020 from 88.3 percent in 2019.

Royce Mendes, a senior economist at CIBC Capital Markets, said the economy still needs more support.

“Turning too quickly toward austerity would be a clear mistake,” he said.