The Central Bank of the Republic of Turkey implemented a backdoor interest rate hike on Tuesday in an effort to calm the spiraling Turkish lira and spiking bond yields.
The central bank is at odds with Turkish President Recep Erdogan over monetary policy. Erdogan has been an outspoken critic of the CBRT’s approach, calling it out for being on the “wrong path” on Friday.
Erdogan sees higher interest rates as at the root—not the cure—of Turkey’s high inflation. And the philosophical divide cuts deep, if only because the central bank is meant to be independent from the government.
On Tuesday, the CBRT slashed its borrowing limits to zero, effectively raising bank funding costs by a quarter of a percentage point. This is coming into effect on Wednesday.
The move means that funding for local banks will be provided by an intraday liquidity window alone, “which [the CBRT] notes should raise the weighted average cost of funding by 25 basis points,” wrote analysts at Brown Brothers Harriman in a note.
“File this under too little too late,” the analysts said. In October, the CBRT’s lending rate was kept unchanged at 12.25%.
Turkey has been struggling with high inflation, and the CBRT warned of even higher inflation throughout the end of the year earlier this month. In September, consumer price inflation stood at 11.2% on the year.
But if the CBRT’s options are limited by harsh rhetoric from the president, what are the odds it will assert its independence and return to regular monetary policy means to ease inflation pressures?
“Erdogan has already resumed his criticism of the central bank for tight policy, which has eroded confidence even more,” the BBH analysts said. “If rates are not hiked outright, can a 4-handle for dollar-lira be far off?”
Even though the central bank action calmed the Turkish lira for a little while, “this does not mean we are out of the woods just yet and any economist worth his salt is seeing the need for a significant amount of tightening by the central bank to really wrestle the issue down to the mat,” wrote Brad Bechtel, currency strategist at Jefferies.
The Turkish lira USDTRY, +0.1264% fell to a fresh all-time low against the U.S. dollar early Wednesday. The buck rose as high as 3.9825 lira, but more recently bought 3.9586 lira, up from 3.9566 late Tuesday in New York.