A big moment for Turkey. After desperate attempts to shore up the lira by burning through its reserves, the central bank must decide whether to raise interest rates instead.
Prime Minister Tayyip Erdogan, fearing an economic slowdown ahead of elections next year, will not want to see a sharp tightening of policy. Instead, he is blaming shadowy forces for his country’s plight.
But a rate rise might be what is required to prevent a full run on the currency and if that is the case, the earlier it is done the better to calm investor nerves. The central bank sent a strong signal last week that it was minded to push up at least some of its key rates regardless of the political pressure.
The odds are on it raising the overnight lending rate by something between 50 and 150 basis points even though testimony by Federal Reserve chairman Ben Bernanke last week has calmed markets about the speed and scale of U.S. withdrawal of stimulus and allowed emerging markets, including Turkey’s, to settle down somewhat.
In language likely to alarm international investors further, Erdogan and members of his government have accused speculators and a “high-interest-rate lobby” of stoking volatility in financial markets to make a quick profit at the expense of the Turkish economy. Now, he has urged Turks not to use credit cards, accusing banks of locking people into poverty with excessive fees.
The central bank’s signal came after a top level meeting of ministers so it could be that it got the nod to act – good for policy unity but it puts a question mark over its independence and over how dramatically it might act.