Turkey raises rates sharply, boosts lira

Cornelia Mascio
Settembre 14, 2018

Brett Diment at Aberdeen Standard Investments said raising rates would put "Turkey on the slow road to recovering some monetary policy credibility, and that is critical".

The Monetary Policy Committee led by Governor Murat Cetinkaya on Thursday increased the one-week repo rate by 625 basis points to 24 per cent, more than the median estimate in a Bloomberg survey that called for a hike of 325 basis points.

Before the move by policy makers in Ankara Thursday, the run on the currency forced the central bank to deliver some tightening where it could.

The central bank said deterioration in pricing behaviour continued to pose upside risks on the inflation outlook, despite weaker domestic demand conditions.

Must give a lesson to those who exploit with price hikes.

The magnitude of the hike was all the more surprising given that just before the decision Erdogan had slammed interest rates as a "tool of exploitation".

Following the news, the Turkish lira rose 5 percent in value against the U.S. dollar, reversing its 42-percent fall this year against the American currency.

It has now increased interest rates by 11.25 percentage points since late April as it struggles to bring the lira out of freefall.

TRT World's Turkey analyst Yusuf Erim has more.

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.

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.

In a decision announced earlier on Thursday, he ruled that property sales and rental agreements must be made in lira, putting an end to such deals in foreign currencies.

There had been indications from the bank that it would raise rates after inflation came in at almost 18 per cent in August, according to official data last week. "If you say "inflation is the cause, the rate is the result", you do not know this business, friend", he added.

As well as being seen to undermine the independence of the central bank, Erdogan in July stunned markets by appointing his son-in-law Berat Albayrak as finance minister.

Turkey's currency and inflationary troubles are also compounded by the threat of steel and aluminium tariffs from the United States as well as sanctions over the detention of an American evangelical pastor.

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