Turkey may have made a long overdue move to raise interest rates in an attempt to rescue its plummeting national currency, but investors are still in doubt over the independence of its central bank ahead of national elections in June.
On Friday, aiming to allay market fears over its monetary policy and rising inflation, Turkish Deputy Prime Minister Mehmet Simsek announced that the country would not step back from a rules-based economy and that its central bank would "deliver additional reaction if needed," hinting at further rate hikes.
The central bank on Wednesday convened an extraordinary meeting to hike rates by 300 basis points to 16.5 percent, amid a currency rout and double-digit inflation. Analysts have called it the "bare minimum," however — and the biggest casualty of this damaged credibility may continue to be the Turkish lira.
Turkey's currency was in free-fall as the central bank, under pressure from President Recep Erdogan — who has called interest rates "the mother of all evil" — wouldn't lift rates to curb the country's ballooning inflation, which in April stood at 10.85 percent. UBS in a note Friday described the hike as having been delivered belatedly, "but should help in stabilizing the lira in the short term."
"Looks like Erdogan got the message — Simsek been told to go out and do whatever it takes to stabilize the market," said Timothy Ash, senior emerging markets sovereign strategist at Bluebay Asset Management. But asked if this changed his mind on the central bank's independence, he said, "Not really."
He described the last rate hike as being "for some, too little, too late," adding that "they never seem to learn... until it is too late."