Turkey’s central bank has aggressively hiked its main interest rate, after a major shakeup of the country’s top economic team.
Bank governor Naci Agbal announced a 4.75 percentage-point rise from 10.25pc to 15pc. This spurred the battered lira to rise almost 2pc against the dollar to 7.55.
In the space of five days last week, the Turkish president Recep Tayyip Erdogan ousted the bank’s chief, replaced the finance minister Berat Albayrak with his son-in-law and, in a speech, promised a market-friendly growth strategy.
It is hoped the move will address this year’s currency slump to record lows and inflation that is stuck in double-digits.
Given Mr Erdogan’s vocal opposition to rate hikes, many investors will interpret the decision as him handing Mr Agbal some power to stabilise the currency to attract foreign capital back to Turkey, as citizens and businesses in the country have increasingly been converting their lira into dollars and euros.
Turkey’s economy, the largest in the Middle East, has contracted twice in as many years, with polls showing eroding support for the President. One, published this week by Turkiye Raporu, shows support dropped to 47pc, below that of the combined opposition for the first time.
The central bank is estimated to have burnt through more than $100bn (£77.3bn) of its reserves this year, leaving it effectively overdrawn by $36bn (£27.2bn), according to analysts at UBS.
In his speech, President Erdogan said that “bitter” policies would be adopted to rebuild reserves and embrace international investors.
The International Monetary Fund predicts the Turkish economy will shrink 5pc this year but rebound 5pc in 2021, or more if the recent Covid vaccine breakthroughs help next year’s tourist season.
Maya Senussi of Oxford Economics said: "The increase is another positive signal towards restoring credibility after the change in the economic management team.
"It is a first step in the process of containing inflation expectations and rebuilding reserves, both of which have suffered badly over the past year. But the Bank does now appear ready to administer the ‘bitter pill’ measures that President Erdogan has alluded to for as long as is necessary."