Published: Fri, September 14, 2018
Markets | By Noel Gibbs

Turkey central bank stuns markets with giant rate hike

Turkey central bank stuns markets with giant rate hike

The Turkish lira gained ground against the US dollar on September 12 ahead of the monetary policy committee meeting of the Turkish Central Bank.

The Turkish central bank on Thursday hiked the one week repo auction rate 625 basis points from 17.75 per cent to 24 per cent, significantly higher than the Bloomberg consensus of 21 per cent.

All 11 economists in a Reuters poll had forecast the bank would tighten, with the predictions ranging between 225-725 basis points as it balances concerns over the lira's weakness with worries about a sharp economic slowdown.

Erdogan again described interest rates as a "tool of exploitation" but vowed that "we can not be taken advantage of".

All business deals inside the country should be conducted in lira, President Tayyip Erdogan said, adding that nobody apart from exporters and importers should cross paths with foreign currency.

"It is pleasing to see common sense prevail", said Aberdeen Standard Investments Head of Emerging Market Debt, Brett Diment.

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"Hiking today does get Turkey on the slow road to recovering some monetary policy credibility, and that is critical".

But Erdogan - who has been accused by critics of pressuring the nominally independent central bank - had earlier charged the bank with failing to control inflation and again aired his unorthodox view that low rates bring inflation down.

The central bank said deterioration in pricing behaviour continued to pose upside risks on the inflation outlook, despite weaker domestic demand conditions.

Following the CBRT's announcement, the Turkish lira strengthened to 6.0151 against the US dollar from a 6.45 level, gaining almost 5 percent. It has still lost 38 per cent of its value against the USA currency this year.

Its monetary committee made a decision to "implement strong monetary tightening to support price stability", it said on Thursday, as it raised interest rates by 625 basis points in the face of a spike in inflation and a slump in the lira. "Erdogan´s speech. was meant to put distance between himself and the (bank´s) decision". "If you say "inflation is the cause, the rate is the result", you do not know this business, friend", he added.

"For a country that is in really deep distress like Turkey, what is important is to restore some of the independence of the central bank and take measures to stem the currency's fall".

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Phoenix Kalen at Societe Generale said the market was both pleased and confused by the bank's move.

"The central bank is independent and makes its own decisions", he said.

Piotr Matys at Rabobank said Turkey also needed to resolve its trade dispute with the USA and rebalance the economy away from big infrastructure projects and consumer spending.

The lira had lost 40 percent of its value against the dollar this year, hit by concerns about monetary policy and, more recently, a diplomatic spat between Turkey and the United States.

Erdogan has cast the lira crisis as an "economic war" targeting Turkey, repeatedly urging Turks to sell their dollar savings to shore up the lira.

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.

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