Turkey central bank should raise rates by at least 200 basis points - economist

Turkey’s central bank should increase its benchmark interest rate by at least 200 basis points, or two percentage points, next week to help stabilise the lira, according to Turkish economist Ali Ağaoğlu.

The central bank meets on Thursday to decide on interest rates. It raised borrowing costs by 2 percentage points to 10.25 percent last month in a move that surprised most economists. Consumer price inflation stands at 11.8 percent, meaning real interest rates are negative.

While a further hike of 2 percentage points may help to bolster the lira’s value, it may not be enough to attract savers back to the currency due to the erosive effects of inflation and lack of confidence, Ağaoğlu said in an interview with Hakan Güldağ, a journalist for Dünya newspaper, Turkey's leading financial newspaper.  

Some people have expressed doubts about the accuracy of official inflation data in Turkey and a slide in the lira has also raised concerns among savers about the advantages of placing their savings in lira deposit accounts, he said.

The Turkish lira dropped to a record of 7.9581 per dollar last week. It traded down 0.2 percent at 7.9425 per dollar on Friday. Losses this year total about 25 percent.

Last month's rate hike was the first in more than two years. The central bank has kept interest rates low to back the government's efforts to stimulate economic growth, heeding a warning by President Recep Tayyip Erdoğan to refrain from increases to borrowing costs, which he says are inflationary. 

Instead, the central bank has turned to unofficial interventions in the currency markets to help stablise the lira, spending tens of billions of dollars of its foreign exchange reserves to the alarm of some foreign and local investors.