Turkey’s central bank hikes rates sharply, boosts lira

Daniel Fowler
September 14, 2018

The depreciation has fueled higher import costs, contributing to an inflation rate that is more than three times the central bank's target, and many investors are calling for a large increase in borrowing costs to put an end to the rout.

Since then, he has continued to dismiss calls to raise rates to address Turkey's longtime woes with its currency, the lira.

The Turkish lira began to recover shortly after the rate hike, strengthening by 3% to 6.16 against the dollar.

President Recep Tayyip Erdogan has appointed himself chairman of Turkey's multi-billion-dollar sovereign wealth fund, according to a decision published Wednesday in the Official Gazette.

Turkey ruled on Thursday that property sales, rental contracts and leasing transactions must be made in lira from now on, halting the use of foreign currencies for such deals in a fresh step to support the ailing local currency.

The central bank's interest rate hike, which surprised investors with its magnitude, comes amid growing concerns that Erdoğan is pursuing policies that will eventually bankrupt the country.

"Hemati told the media a meeting with the administrators of the Turkish and Russian Central Banks is expected in the near future and he hopes the agreed topics would rapidly come into effect", the Turkish agency said.

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

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The currency has lost 40 percent of its value against the dollar this year, hit by concerns about Erdogan's influence on monetary policy and more recently by a diplomatic spat between Turkey and the US.

But Neuteboom of ABN Amro said much more was needed for Turkey to turn around "the negative spiral" the economy is in.

He earlier charged the bank with failing to control inflation and again aired his unorthodox view that low rates bring inflation down.

Economists have argued the nominally independent bank has come under pressure from Erdogan who, only a couple of hours before its decision, launched a blistering attack on the bank and described interest rates as a "tool of exploitation".

"Obviously, it will have negative consequences on the economy but, I would say, it is less important if you have a hard landing than big corporate defaults due to a vicious cycle between (lira) depreciation and inflation", he said.

TRY is down around 2% today and it has intensified the sell-off after President R.T.Erdogan advocated for lower interest rates in his comments earlier in the day, reiterating his well-know stance on rates. And on the morning of the rate hike decision, Erdogan was busy.

"Great decision - made all the more hard by the huge pressure on the central bank from Erdogan", said Bluebay Asset Management LLC strategist Tim Ash.

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