Turkish lira eases after hefty central bank rate hike

Daniel Fowler
September 14, 2018

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

The lira firmed to 6.01 against the dollar following the decision, from more than 6.4176 beforehand.

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

The bank is expected to raise interest rates on September 13.

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.

"It nearly seems like it's a game of "good cop, bad cop" being played out between the Turkish authorities - with President Erdogan on the one hand still making statements regarding his dislike of interest rates and. a very sizeable reaction from the central bank in response to the recent inflationary and geopolitical developments".

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".

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The central bank surprised investors by not raising rates when it last met in July.

Piotr Matys, emerging markets foreign exchange strategist at Rabobank, said the central bank had taken a decisive step which should allow it to gradually restore confidence in the lira. "If you say "inflation is the cause, the rate is the result", you do not know this business, friend", he added.

As part of Turkey's medium-term economic program, which Finance Minister (and Erdogan son-in-law) Berat Albayrak is scheduled to release this month, officials are expected to give a clearer indication as to how the country intends to escape from its plight of high private debt, slipping currency, high inflation and large current account deficit. The independence of monetary policy has been in doubt since Erdogan pledged in his election campaign this year to take on a greater role to bring interest rates lower.

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

"By saying the central bank is independent while criticizing it for misguided policies, Erdogan is pointing the finger of blame at the central bank".

He said Turkey also needed to resolve a dispute with the United States, which helped drive the lira to a record low of 7.24 against the dollar a month ago, and rebalance the economy away from big infrastructure projects and consumer spending.

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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