Turkey’s central bank bit the bullet last night, despite Prime Minister Tayyip Erdogan calling for it to hold firm just hours beforehand, and what a bite it was.
After months trying to avoid a rate rise it put 4.25 full percentage points on the overnight lending rate, taking it to 12 percent. No one can accuse Governor Basci of being under the government’s thumb now. The move vaulted expectations.
The big questions for Turkey are what such a magnitude of tightening, which the central bank said would persist, does to a faltering economy and how Erdogan, who is on a two-day trip to Iran, reacts.
It was his crackdown on the police and judiciary in response to a corruption inquiry that has got uncomfortably close to him, that more than anything else has unnerved investors. But let’s not forget that before that he railed against a shadowy “interest rate lobby” which he said was trying to undermine Turkey. With elections looming he may lash out.
The wider question is whether Turkey’s dramatic move is enough to fundamentally shift sentiment about emerging markets which have been in the grip of a week-long sell-off. Or will it merely lift Turkey out of the firing line? Or will it achieve neither? For now, the lira has shot up.
All that puts the focus on South Africa’s Reserve Bank which has its own decision to make today.