Turkey central bank stuns markets with giant rate hike

  • Turkey central bank stuns markets with giant rate hike

Turkey central bank stuns markets with giant rate hike

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

There had been indications from the bank that it would raise rates after inflation came in at almost 18 percent in August.

The central bank said there was still an upside risk to Turkey's inflation outlook from what it called a deterioration in pricing behaviour, despite weaker domestic demand conditions.

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.

Earlier in the day, Erdogan published an executive decree that forces contracts between two entities in Turkey to be made in liras rather than foreign currencies.

In a statement, the bank's Monetary Policy Committee said the policy rate was increased to 24 percent, up from 17.75 percent.

It vowed the tight stance in monetary policy would be "maintained decisively until inflation outlook displays a significant improvement".

The bank must balance concerns over slipping growth, which, although a robust 5.2 per cent in the second quarter on an annual comparison, showed signs of weakness with some analysts predicting Turkey is heading for recession.

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.

Turkey's central bank today 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.

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

Anthony Skinner, director of Middle East and North Africa at Verisk Maplecroft, told AFP he believed the hike had already been agreed. By way of comparison, the Federal Reserve's much-debated rate hikes earlier this year nudged the rate just fractions of a percentage point to around 2 percent in the U.S.

The main refinancing rate, which determines the cost of credit in the economy, remained unchanged at 0.00 percent while the rate on the marginal lending facility - the emergency overnight borrowing rate for banks - remains at 0.25 percent.

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.

The sense of doom was compounded on August 1, when the United States imposed selective sanctions on Turkey over the detainment of an American pastor.