(Bloomberg) -- Turkey’s new central bank governor raised the benchmark interest rate in line with forecast, acting boldly on his market-friendly messages and capping a period of tightening by stealth.
The Monetary Policy Committee led by Governor Naci Agbal increased the one-week repo rate to 15% from 10.25% on Thursday, as forecast by most analysts polled by Bloomberg. The central bank said all funding will be provided through the main policy rate.
The lira rallied as much as 2.5% after the decision. It was trading 1.7% stronger at 7.5765 per dollar at 2:07 p.m. in Istanbul.
“The Committee has decided to implement a transparent and strong monetary tightening in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process,” the central bank said in a statement.
The decision suggests that unlike his recent predecessors, Agbal -- appointed this month as part of a sweeping overhaul of Turkey’s economic decision makers -- has the backing of President Recep Tayyip Erdogan for a more orthodox effort to protect the lira and curb inflation.
After long advocating the theory that high interest rates cause rather than curb inflation, the president pledged to support his new economic managers with market-friendly policies following declines in the currency to record lows.
Agbal inherited a complicated funding structure from his predecessor Murat Uysal, who relied on backdoor tightening using fringe tools.
Uysal’s approach lifted the average cost of funding to 14.8% on Wednesday, from less than half that level in July. But even supported by state lenders’ unannounced interventions in foreign-exchange markets using central bank reserves, it failed to stem the lira’s collapse.
With inflation in double digits for much of this year, the real interest rate was negative. The currency performed worst among emerging markets peers in 2020 up until Agbal’s appointment on Nov. 7 and the resignation soon after of the president’s son-in-law as economy minister.
The statement said the monetary authority will only use its one-week repo rate to fund commercial banks, a step toward making policy more predictable. Economists have been suggesting that the central bank should drop the less transparent approach brought back in August.
Shortly before he was sworn in with sweeping authority in 2018, Erdogan promised to seize control of monetary policy to implement his unorthodox views on interest rates and prices. Turkish markets were routinely hammered over the following two years.
Last week, with the lira way above 8 to the dollar, he changed tack, sparking optimism Turkey will allow interest rates to rise to offer a sufficient inflation-adjusted return.
“Like everywhere else around the world, in our country it is the central bank’s job to determine and implement policies needed to curb inflation,” Erdogan told lawmakers from his AK Party.
(Updates with central bank comments starting in second paragraph)
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