Turkey is ready to hike rates if May inflation rises

The Turkish lira has been under massive amounts of pressure over a number of recent weeks with concerns that Turkey’s economy was overheating. It had appeared that the central bank was unwilling to act against political pressure to keep rates low. However, in the last few days, at an emergency meeting, Turkey’s central bank raised rates after the lira’s decline this year exceeded a whopping 20 percent. 

At the same time, the central bank announced long-awaited changes to simplify its convoluted, policy-rates system, considering this to be a good time to finalize simplification and provide more support for the currency in an effort to backstop the emergency hike. This is ending a much-denounced multi-rate structure that had previously left investors striving to understand such policy. 

Abandoning the multi-rate framework was a priority 

Governor Murat Cetinkaya has said that abandoning the multi-rate framework was a priority for him. After the adjustment, the benchmark rate will be 16.5 percent, unchanged from the current main funding rate.  All funding will be done through the one-week repo rate. Investors have cheered the bank’s simplifications as a sign Turkey is returning to a clearer and more predictable framework while it moves to arrest a slide in its currency.