Turkey central bank surprises markets with big rate hike

14 September, 2018, 04:15 | Author: Billie Castillo
  • Erdogan appoints himself chairman of Turkey's sovereign wealth fund

The Turkish lira has lost more than 75% of its value against the dollar since January, pushing up the cost of a wide variety of goods.

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

"Accordingly, the Committee has made a decision to implement a strong monetary tightening to support price stability", it added, explaining the hike.

With Thursday's decision, the ECB's rate on bank overnight deposits, which is now its primary interest rate tool, remains at -0.40 percent. 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.

In another bid to prop up the lira, Erdogan earlier on Thursday ordered by decree that property agreements in foreign currencies would not be allowed.

It said the policy would be "maintained decisively until inflation outlook displays a significant improvement".

Phoenix Kalen, director of EM strategy at Societe Generale, said the market was both pleased and confused by the bank move.

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"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.

It said: "Accordingly, the committee has chose to implement a strong monetary tightening to support price stability".

The bank is also fighting a losing battle against inflation with annual consumer price inflation hitting 17.9 percent last month, its highest level since late 2003.

The embattled currency has fallen by 40% this year amid a lack of interest rate hikes to control inflation. The rate hike could squeeze growth further, but independent experts say it is needed to contain inflation of about 18% and support the currency. 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 bank later said funding would be provided via the policy rate, the one week repo auction rate, instead of through overnight lending from September 14. Subsequently, the lira lost some 25 percent of its value while Turkish authorities have taken a series of steps created to support the currency, with the central bank taking liquidity measures and the banking watchdog limiting derivative transactions.

The lira has plunged in recent weeks on concerns over domestic policymaking and a crisis in relations with the United States.

Relations with the USA deteriorated last month after Washington imposed sanctions on two Turkish ministers over the detention of an American pastor and President Donald Trump doubled steel and aluminium tariffs on Turkey.

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