Turkish lira bounced back from historic low 4.90 to 4.55 against the US dollar after the Central Bank raised benchmark lending rate from 13,5% to 16,5% following an emergency meeting on Wednesday to prevent a full-scale currency crisis.
The central bank made an unscheduled announcement to increase its top interest rate to 16.5 per cent from 13.5 per cent to help stabilise the lira, which has fallen about 20 per cent this year to a series of record lows. The lira fell more than 5% Wednesday against the USA dollar to hit a new record level of 4.9290, pushing toward the psychological level of 5 to the dollar, Reuters reports. Inflation is now at 10.85 percent.
His remarks for potential interference in the Central Bank's independent policy-making mechanism produced a backlash in worldwide markets and sent lira plunging to historic lows.
The 300 basis points hike was largely in line with what economists said was needed and, in a hawkish statement, the central bank said it would continue to use "all instruments" to achieve price stability.
"Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement", the bank added.
The sharp fall in the currency's value has come at a hugely sensitive time as Turkey heads to June 24 presidential and parliamentary elections where Erdogan is seeking a new mandate and a thumping parliamentary majority.
Turkey's finances could deteriorate rapidly if authorities fail to stem pressure on its currency and borrowing costs, credit rating agency S&P Global said on Tuesday.More news: Nipah virus claims one more life, Death toll rises to 11
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Its performance has been even worse than the Argentine peso which has also suffered severe turbulence over the last month.
"This rhetoric is extremely unsafe and will put Turkey in a dead-end street", Durmus Yilmaz, a former governor of the Central Bank who is running for Parliament, said of Mr. Erdogan's remarks in London.
What Our Economists Say "The move provided short-term relief with the lira reversing its losses today, but it fails to address the underlying problem - the direction in which President Recep Tayyip Erdogan is taking the country".
Things began to fall apart when President Erdogan who was in London for a three-day visit to calm concerns of worldwide investors told Bloomberg last week that he would seek a greater say in shaping monetary policy.
The Borsa Istanbul Group announced on Wednesday that it converted all its foreign exchange assets, excluding short terms needs, into Turkish lira. It traded 2 per cent lower at 4.7641 per dollar by 10.20am in Istanbul.
The economy has generally been a trump card for Erdogan in his 15 years in power, with the Turkish strongman crediting himself with ending chaos that brought the country to near financial meltdown in the 2000-2001 crisis.