The Turkish central bank has taken a step in the right direction with its latest decision: it raised the key rate by 6.25 percentage points to 24.00%. This is not only significantly more than market players had expected ahead of the central bank meeting. The key rate level is also – at least at the moment – well above the prevailing inflation rate. So a central demand on the central from international observers, namely that it must send a clearly restrictive signal to the Turkish economy, has been implemented. Probably even more important is that the monetary watchdogs’ decision today has placed them clearly at odds with the calls coming from the president. This morning Erdogan demanded that the central bank “lower these high interest rates.” This has given an unusual lift to hopes that the central bank on the Bosporus could after all be more independent than it seemed to be in the past few months.
Turkey and the lira still face major challenges
Just how much interest was shown today in the Turkish central bank is demonstrated by the fact that its homepage was not accessible immediately after the announcement of the key rate decision. This does not seem to have bothered the lira. It benefited appreciably from the central bank news and appreciated at times by around 7% compared to the exchange rates just before the announcement of the central bank decision. A few minutes later around 5% of this was still left over. It may well be the case that the monetary watchdogs had wished for a clearer reaction. But in light of the challenges that Turkey and its currency continue to face the extent of the appreciation would appear to be justified.
After all, it is also clear that the central bank can and must lay the foundation stone for an end to the lira crisis but that it cannot do so alone as the rouble crisis of 2014 and the recent depreciation of the Argentinean peso have shown. Further steps, especially from the political side, need to follow if a lasting solution is to be found to the strained situation. This begins with the independence of the central bank, which may still not be regarded as secure, and includes adequate expertise and experience in the finance ministry and an improvement in international relationships, especially with the USA. Without these adjusting screws the latest lira recovery is on shaky ground.