Lira Under Pressure as Interest Rate Increases Loom

by on January 28, 2014 3:47 pm BST

The Turkish central bank is under pressure as a need for an emergency increase in interest rates loom. In the wake of the lira’s cliff dive and growing inflation, Erdem Basci said they will be no delays if tighter monetary policy was needed and that the central bank will not be pressured by the Turkish government. Basci, the central bank governor, said that capital controls will not be a topic of discussion, such as what the world seen in Cyprus.

The lira’s decline was thrown over the edge as police began to initiate an investing probe on political corruption. Prime Minister Tayyip Erdogan retaliated by firing those in charge of the probe. With two months left until the next election cycle, Erdogan will aim to maintain the economic climate, while voicing his opinion against higher rates.

In regards to higher interest rates, “nobody should have any hesitation that the central bank will use all available tools. The bank will not hesitate to take steps to make lasting tightening in monetary policy if deemed necessary,” said Basci.

Economists believe that the central bank will increase rates by 225 bps, or 2.25 percent, to 10 percent. There are also rumors that a rate hike as high as four-to-six percent could happen to strengthen the lira. Erdogan , and his new economy minister, want the central bank to keep rates as is; and the pro-government Yeni Safak newspaper had the front page headline “stand firm, don’t rise,” along with Basci’s picture.

Inflation is expected to increase to 6.6 percent by the end of the year, 1.3 percent higher than forecasts. The central bank’s target is currently five percent.