Turkish Central Bank broke Erdogan's resistance

Turkish Central Bank broke Erdogan's resistance

Acting to stem a currency crisis that has rattled markets worldwide, Turkey’s central bank sharply raised interest rates on Thursday, defying a call by President Recep Tayyip Erdogan just hours earlier to lower borrowing costs. As The New York Times writes in the article Defying Erdogan, Turkey’s Central Bank Raises Interest Rates, 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 Mr. Erdogan was taking too active a role in the management of the economy. 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.”

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-fueled economic growth.

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

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.

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.