Fitch: Turkey's rate rise to ease pressure on lira and reserves

Turkey's interest rate rise could reduce capital flow vulnerability, Fitch says.

Fitch: Turkey's rate rise to ease pressure on lira and reserves

World Bulletin / News Desk

Turkey’s increased interest rates will reduce the sovereign’s vulnerability to short-term capital outflows, and could ease pressure on the lira and reserves, Fitch Ratings said.

The ratings agency said that the increased interest rates will prepare the authorities to adjust policy settings, and combat shocks for economic stability.

"Rate increases will dent domestic demand and could renew concerns about an economic 'hard landing'. But the fall in the lira and improved prospects for global economic recovery, particularly in the eurozone, hold out the prospect of higher net exports and a faster current account adjustment,” Fitch said.

"Turkey’s Central Bank action shows that monetary policy adjustments are still possible despite the political desire to maintain growth. It acknowledges the limitations of macro-prudential measures to restrain the current account deficit and inflation, and of foreign exchange market intervention to halt the lira's depreciation."

"A more stable lira would lessen banks' foreign exchange risks, resulting from the foreign exchange market lending to sometimes un-hedged corporate borrowers."

The agency added that a modest loosening of fiscal policy would not be surprising ahead of local and presidential elections.

Fitch has assigned Turkey’s credit rating to ‘BBB’ minus with a stable outlook. Turkey's rating and sector outlooks are also stable, the agency confirmed.

Turkey's Central Bank raised its interest rates at midnight on Tuesday; borrowing rates rose to 8 percent from 3.5 percent, and the lending rate increased to 12 percent from 7.75 percent.

As a result of the movements, the dollar value decreased from 2.26, to 2.18, and the euro value decreased from 3.09 to 2.97.

Mixed reactions after Turkey Central Bank rate hike

Turkey's Central Bank's decision to dramatically raise interest rates on Tuesday night, has been met with mixed reactions both inside and outside of the country.

Economists have suggested that policymakers in emerging economies will closely watch the effects of Turkey's move, with the U.S. Federal Reserve due to announce its policy decision on Wednesday.

The Central Bank more than doubled the borrowing rate from 3.5 percent to 8 percent and raised the lending rate from 7.75 percent to 12 percent.

The dollar value decreased from 2.26 to 2.18 and the euro value decreased from 3.09 to 2.97 as a result of the announcement.

“Turkish Central Bank made the right decision to support the Turkish lira,” Timothy Ash, chief emerging-markets economist at Standard Bank said. “As the bank indicated in the last year, it is following more traditional policy.”

He added that Turkey´s economy is expected to grow by 2.5 percent in the year and that he expects that Turkish inflation will be between seven and eight percent.

In contrast, Turkey´s main opposition party CHP´s Deputy Chairman Faik Oztrak said: “People in Turkey would pay the Central Bank's decisions with less growth, less investment and more unemployment."

“The Turkish Central Bank had to increase the interest rates on Tuesday night after selling its foreign reserves to stop the devaluation in Turkish Lira against to other currencies,” Oztrak said.

Also Independent Industrialists and Businessmen Association (MUSIAD), one of the largest business associations in Turkey, released a statement making their disapproval clear and claiming that there are have not been any negative macro-economic indicators and average growth of nine percent in the economy during last nine month.

"We do not approve this radical change while real sector investment increases in third quarter of 2013."

On the other hand the Finance Minister Mehmet Simsek said the interest rate hike significantly allayed his worries.

“Let me be clear. There is a down gradient risk for growth. With the effect of current political developments in Turkey and tightening monetary policy, growth will slow down," said Simsek. "But this will create a significant decline in current account deficit and make a positive effect on economy in long term."

Starting next month, the U.S. Central Bank will cut its purchases of bonds, known as quantitative easing, raising concerns that investors could pull out of the emerging market economies, such as Turkey, Brazil and India.

Güncelleme Tarihi: 30 Ocak 2014, 10:20