Tolga Uluturk/ZUMA Press Wire
Shares fell 9%
Turkish lira down 4%
Rate had been falling
Turkey’s central bank has raised its overnight lending rate, a move designed to tighten liquidity and reassure markets it is prepared to intervene in response to financial instability stemming from the arrest this week of a leading political opposition figure.
The move has so far failed to settle the markets.
The detention of İstanbul mayor Ekram İmamoğlu – a rival to President Recep Tayyip Erdoğan – on March 19 over allegations of corruption and connections to a terrorist group, has rocked the local markets.
The İstanbul stock exchange index fell 9 percent on the day, while the Turkish lira dipped 4 percent against most major currencies.
The turmoil prompted Turkey’s central bank to call an unscheduled meeting of its monetary policy committee late Thursday, at which it raised its overnight lending rate from 44 to 46 percent.
The bank said the move was in response to recent market developments that could pose a risk to efforts to combat inflation, while flagging the possibility of further rate action.
“In order to maintain the sound functioning of financial markets, additional actions will be taken if deemed necessary,” the bank said in a statement.
“Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen.”
Economist Mustafa Sönmez told AGBI that the central bank had to act to try and shore up confidence by increasing its overnight rate and show it was prepared to take action.
“This was done to show that the central bank is alert to risks and to give the feeling that it is in control and will act when necessary,” he said. “This is due to the need for the central bank to regain trust.”
Markets, however, did not react positively to the move, with shares on the İstanbul exchange shedding more than 7 percent of their value in early trading on Friday.
The lira also dipped further, dropping to more than TL38 to the US dollar, though short of the
TL42 low to which it fell during Wednesday on news of İmamoğlu’s detention.
With recent falls in inflation — which had receded from a high of 66 percent in July to 39 percent in February — the central bank had begun lowering its key lending rate.
Cuts of 250 basis points in December, January and March took its policy weekly repo rate to 42.5 percent. Now, further reductions expected in April may be put on hold.
With the possibility that the government may remove the İstanbul mayor from his position and replace him with a state-appointed administrator, Sönmez said it is unlikely the central bank’s efforts to calm markets will be successful.
“The problem is not economic but political,” he said. “The expectation of a trustee being appointed does not help to rebuild trust.”
