Turkey central bank surprises markets with big rate hike

Turkey central bank surprises markets with big rate hike

Facing a deep slide in the lira and a steep run higher in inflation, the central bank felt compelled to lift rates to restore investor confidence-a risky gambit that boosted the lira but could further damage the economy.

There had been indications from the bank that it would raise rates after inflation came in at almost 18 percent in August.

Erdogan again described interest rates as a "tool of exploitation" but vowed that "we can not be taken advantage of".

Earlier in the day, Erdogan had launched a blistering attack on the central bank, causing a sharp fall in the value of the lira just ahead of the crucial rate decision.

It said: "Accordingly, the committee has chose to implement a strong monetary tightening to support price stability".

The lira has lost roughly 40 percent of its value against the US dollar this year, and its inflation rate sits at about 18 percent.

Before today's interest rate decision, Mr Erdogan announced he was banning the use of foreign currencies in property sales, rental contracts and leasing transactions and ruled all such transactions must now be made in lira.

The bank is also fighting a losing battle against inflation with annual consumer price inflation hitting 17.9 percent last month, its highest level since late 2003.

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The bank´s intervention was the latest aggressive rate hike to calm economic turbulence in an emerging market after the Argentinian central bank´s recent hike from 45 to 60 percent on August 30.

"Erdogan's comments clearly show that he does not support this and it becomes much more hard, if not impossible, for the Turkish central bank to tighten enough to stabilize the lira and get inflation under control", Esther Reichelt, a forex strategist at Commerzbank in Frankfurt, told DW.

All 11 economists in a Reuters poll forecast the bank would tighten, but with the rate hike predictions ranging between 225-725 basis points as the bank balances concerns over lira weakness with worries about an economic slowdown.

Key rates are now at their highest level since 2004, around a year after Erdogan first came to power. "If you say 'inflation is cause, the rate is the result, ' you do not know this business, friend".

The bank later said on Twitter that funding would be provided via the policy rate, the one week repo auction rate, instead of through overnight lending from September 14.

Analysts say the lira´s plunge last month had been sparked by a combination of concerns over domestic policymaking and a crisis in relations with the United States.

He's delivered on that pledge, ousting the old guard of policy makers who'd guided the economy since 2002 and giving himself the sole authority to make appointments at the central bank and other state organizations.

A growing crisis became acute earlier this year following the detention of an American pastor on espionage and terror-related charges, which prompted Donal Trump to double the import tariffs on Turkish steel and aluminium.

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