Turkey’s interest rate hike may mutate into a cut

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Turkey’s central bank raised its benchmark interest rate by 2 percentage points to 10.25 percent on Thursday in a move welcomed by foreign investors. The embattled lira jumped in value.

But the increase may turn out to be a cut should the central bank provide banks with all their funding through the new rate, data shows. On Friday, it opened up an auction for them to borrow at the benchmark rate.

Before Thursday’s decision, Turkey’s central bank had tightened monetary policy by stopping lending at the benchmark rate and instead funding banks at fixed interest rates of as high as 11.25 percent, meaning the average cost of funding had stood at about 10.6 percent on Wednesday.

Turkey’s lira slid to a record low of 7.72 per dollar just prior to Thursday’s rates decision, increasing concern among investors that lax monetary policy was risking financial stability. The currency has since strengthened to as high as 7.496 per dollar.

Now investors are wondering what kind of lending mix the central bank plans. Should the bank concentrate funding at the benchmark rate, average interest rates could decline and would remain well below annual inflation of 11.8 percent.

Monetary policymakers also hiked other interest rates at Thursday’s meeting. The bank’s overnight lending rate now stands at 11.75 percent compared with a previous 9.75 percent, while it raised the late liquidity window rate to 13.25 percent from 11.25 percent.

Turkey’s government has pressured the central bank to keep interest rates low as it flooded the market with cheap loans from state-run banks. Higher central bank interest rates would make those loans more expensive for businesses and consumers.

The average cost of commercial loans has already risen to an annual 14.3 percent as of Sept. 18 from 9.3 percent in mid-July, according to central bank data. Personal loans now carry average interest rates of 18.6 percent compared with less than 12 percent three months ago.

(Story was updated to correct previous overnight lending rate figure in the sixth paragraph.)

Ahval

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