Rate hike spared Turkey's credibility, threat to growth limited -Simsek

by Reuters
Wednesday, 29 January 2014 11:00 GMT

ISTANBUL, Jan 29 (Reuters) - Turkish Finance Minister Mehmet Simsek played down the impact on growth of a sharp hike in interest rates on Wednesday, saying the economy would have suffered greater damage from a loss of faith in the central bank.

The bank raised all its key interest rates in dramatic fashion at an emergency policy meeting late on Tuesday, ignoring opposition from Prime Minister Tayyip Erdogan as it battles to defend the crumbling lira currency.

The boldness of the actions stunned investors, sending the lira higher and driving a broad revival in global risk appetite, but it raised the prospect of Turkey missing its four percent growth target this year, something Erdogan has been keen to avoid with an election cycle starting in two months.

"If we don't preserve credibility, growth would lose ground on a much bigger scale, it would weaken much more rapidly," Simsek told Turkish broadcaster NTV when asked about the midnight rate hike announcement.

"There has been a rapid comeback in the exchange rate, which is an indicator of regaining credibility," he said.

The lira strengthened to 2.18 to the dollar in the immediate aftermath of the rate hike, a sharp rise from the record low of 2.39 it hit on Monday. It pared some of its gains by 1030 GMT however, trading at 2.21.

The cost of insuring Turkish debt fell to a three-week low, according to data from Markit.

Erdogan has been a vociferous opponent of higher borrowing costs, railing against what he describes as an "interest rate lobby" of speculators seeking to stifle growth and undermine the economy. Hours before Tuesday night's decision he reiterated that he was opposed to interest rate hikes.

His stance had left the central bank struggling to contain the lira's precipitous slide, with investor confidence damaged by a corruption scandal shaking the government and the global impact of a cut in U.S. monetary stimulus.

"The impact of the rate hike on growth would certainly be negative. However, without a hike the lira was in free fall. That would hurt economic activity much more," said Mehmet Besimoglu, chief economist at Oyak Securities.

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