Turkey's Central Bank Defies Erdogan With Drastic Interest Rate Hike

Share

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".

He repeated however, his belief that interest rates should be cut, calling them an "instrument for exploitation".

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

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 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.

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.

The bank described the hike as a "strong monetary tightening to support price stability".

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

More news: Storm sweep Mystics, win third WNBA title
More news: Watch live streaming video of Hurricane Florence rolling into North Carolina
More news: Britain reports two separate cases of rare monkeypox infectionNaija247news

A "tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement", it added.

TRT World's Turkey analyst Yusuf Erim has more.

Erdogan, a self-styled "an enemy of interest rates", has cast the lira crisis as an "economic war" targeting Turkey and has repeatedly urged Turks to sell their dollar savings to shore up the lira.

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. "If you say 'inflation is cause, the rate is the result, ' you do not know this business, friend".

"Erdogan's comments clearly show that he does not support this and it becomes much more hard, if not impossible, for the Turkish central bank to tighten enough to stabilize the lira and get inflation under control", Esther Reichelt, a forex strategist at Commerzbank in Frankfurt, told DW.

In a speech to a traders' confederation in the capital, Ankara, Mr Erdogan said on Thursday that nobody should carry out business in foreign currency apart from exporters and importers.

The central bank said it was returning to funding via one-week repos from Friday, having funded the market at an overnight lending rate of 19.25 per cent for the last month.

He's delivered on that pledge, ousting the old guard of policy makers who'd guided the economy since 2002 and giving himself the sole authority to make appointments at the central bank and other state organizations.

Share