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Turkey’s Central Bank Overhauls Interest Rates to Boost Lira

Turkey’s Central Bank announced simplification of monetary policy to create one headline interest rate, a move that helped the lira rally after weeks of steady decline against the foreign currencies.

The lira has lost almost 13 percent in value over the last month alone as controversial comments by President Recep Tayyip Erdogan about monetary policy added to anxiety over the broader health of the Turkish economy.

The issue has come to a head less than a month ahead of June 24 elections where Erdogan will seek a new presidential mandate with the economy a key campaign issue.

The Central Bank had on Wednesday sought to come to the lira’s rescue with an emergency 300 basis point rate hike and its latest announcement was welcomed as an overdue streamlining of monetary policy.

“A decision has been made to finalize the simplification process regarding the operational framework of the monetary policy,” the bank said in a statement on its website.

The bank said the one-week repo rate will be the policy rate, and be equal to the current funding rate which is 16.50 percent.

Economists had long criticized the central bank for employing a myriad of interest rates with little guidance over what the headline rate was.

The lira gained around 2.7 percent in value against the dollar after the bank’s announcement, rallying to 4.57 against the greenback, and 5.32 against the euro.

The bank also said Monday that the overnight borrowing and lending rates will be determined at 150 basis points below/above the one-week repo rate.

The new policy will be operational from June 1, it added.

‘Positive Step’

Economy Minister Nihat Zeybekci hailed the new policy as a “positive step” and voiced the government’s support for the central bank.

“All of these are important, positive steps. We will see the outcome,” Zeybekci was quoted as saying by the official Anadolu news agency.

“We are supporting our central bank with all our might.”

Erdogan, with an eye on growth, strongly opposes rate rises but appears to have been persuaded to accept the bank’s emergency rate hike last week.

The Turkish president had rattled markets with repeated criticism of the nominally independent central bank and even describing interest rates as the “mother and father of all evil.”

Gokce Celik, chief economist at Istanbul-based QNB Finansbank, praised the bank’s decision to finalize the process of simplifying rates rather than wait for the next monetary meeting scheduled for June 7.

But she cautioned: “The trend in the medium term, however, will depend on other factors such as the election results, the economy management and finally, the policy mix to be implemented in the post-election period.”

The latest measures have so far only brought the lira back to the levels it was trading at on May 21. At the start of May, it was trading at 4.1 lira to the dollar.

But the move by the Central Bank also improves sentiment as Deputy Prime Minister Mehmet Simsek and Central Bank’s chairman Murat Cetinkaya travel to London Tuesday for a meeting with fund managers and businessmen.

Zeybekci said the government has started a “very strong process” combining monetary policy with other structural measures and fiscal discipline.

This would be followed by a second stage in which the fight against high rate hikes and high inflation would be prioritized, he added.

“We will become stronger. We will be in the top 10 in the world and in the top three in Europe,” he said.

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