Markets

Turkey central bank stuns markets with huge rate hike

Turkey central bank stuns markets with huge rate hike

Turkish lira banknotes are seen in this picture illustration in Istanbul, Turkey August 14, 2018.

Turkey's central bank on Thursday surprised markets with a bigger than expected rate hike to battle soaring inflation and boost the lira, prompting the embattled currency to surge in value.

The lira reacted strongly to the rate rise, initially up 5% in value to 6.0 lira to the U.S. dollar, later settling up more than 2.7% at 6.15 to the dollar.

But just hours before the CBRT decision, president Erdogan had dubbed interest rates as a "tool of exploitation", with the lira sliding further.

"The central bank is independent and makes its own decisions", he said.

He also decreed that local property sales, rental contracts and leasing transactions could no longer be conducted in foreign currency, in a fresh bid to buttress the flagging lira.

The rate rise comes on the same day as the Bank of England left the interest rate untouched at 0.75%, citing heightened risks to global growth as a result of volatility within emerging markets, as well as tensions between the United States and China.

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

It said the policy would be "maintained decisively until inflation outlook displays a significant improvement".




TRT World's Turkey analyst Yusuf Erim has more.

"Turkey needs structural reforms to increase productivity, to decrease its dependence on short-term portfolio flows and to decrease the rigidness in the labour market".

"They act according to the Central Bank's decisions and there are now rates as high as 50 percent in practice", Erdoğan said, underlining that such sharp profits could only be gained through narcotics.

Ignoring calls for restraint from President Recep Tayyip Erdoğan, the bank raised its main short-term rate from 17.5% following weeks of pressure from global investors.

Erdogan, a self-described "enemy of interest rates", assumed new powers under an executive presidential system following an election in June and has appointed his son-in-law as finance minister. "If you say 'inflation is cause, the rate is the result, ' you do not know this business, friend". And on the morning of the rate hike decision, Erdogan was busy.

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.

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.

"For a country that is in really deep distress like Turkey, what is important is to restore some of the independence of the central bank and take measures to stem the currency's fall".


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