Turkey central bank surprises markets with big rate hike

13 September, 2018, 19:56 | Author: Eric Barnett
  • Turkish lira gains value against US dollar

In an overhaul of the Turkiye Wealth Fund, seven new members were appointed, including Erdogan's son-in-law, Treasury and Finance Minister Berat Albayrak, as the deputy chairman.

"Hiking today does get Turkey on the slow road to recovering some monetary policy credibility, and that is critical".

"Accordingly, the Committee has made a decision to implement a strong monetary tightening to support price stability", the monetary policy committee statement said.

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

While the lira's plight has made it "rational to expect at least 1000 basis points" added to interest rates, opposition to higher borrowing costs among Turkish officials made a smaller increase more realistic, Rabobank currency strategist Piotr Matys said before the decision.

But Erdogan - who has been accused by critics of pressuring the nominally independent central bank - had earlier charged the bank with failing to control inflation and again aired his unorthodox view that low rates bring inflation down.

The move comes as Turkey's currency has lost nearly a third of its value against the dollar since January.

The bank implemented what economists described as a hidden interest rate hike in mid-August, forcing banks to borrow at the higher 19.25 per cent through the overnight lending facility.


Key rates are now at their highest level since 2004, around a year after Erdogan first came to power.

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. Rising U.S. interest rates have discouraged the riskier reach for yield, deepening home-grown crises. "If you say ´inflation is the cause, the rate is the result´, you do not know this business, friend", he added.

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.

Turkey's central bank said that inflation developments pointed "to significant risks to price stability" due to the recent fall in value of the lira.

Piotr Matys at Rabobank said Turkey also needed to resolve its trade dispute with the USA and rebalance the economy away from big infrastructure projects and consumer spending.

That decision sent the lira tumbling by a quarter and prompted Turkish authorities to impose a series of measures meant to support the currency.

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.

Erdogan has cast the lira crisis as an "economic war" targeting Turkey, repeatedly urging Turks to sell their dollar savings to shore up the lira.

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