Published: Sun, September 16, 2018
Markets | By Noel Gibbs

Turkey central bank raises benchmark rate to 24%; lira rallies

Turkey central bank raises benchmark rate to 24%; lira rallies

Turkey's central bank on Thursday raised its key interest rate sharply to contain inflation and support the currency after steep declines this year, despite President Recep Tayyip Erdogan's comments earlier opposing any rate hikes.

The lira traded flat on Friday before Erdogan's remarks, holding the gains it made against the USA dollar on Thursday after Turkey's central bank increased interest rates and the government banned the use of foreign currencies in the country's property market.

The lira is tumbling against the U.S. dollar on Thursday morning after Turkish President Recep Erdogan called for lower interest rates, just hours before the central bank is due to make a decision. It later shed some of those gains but was still up 3.0 percent in value at 6.14 to the dollar.

The decision to raise interest rates appears to underline the bank's independence, but Erdogan's preceding speech denouncing interest will loom over the markets, sowing worry that he will soon exert his already outsized influence on the country's economy once more.

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In a statement, the central bank noted that the local economy was weakening while inflation was rising. The bank is due to publish its latest decision later Thursday and investors are hoping for an increase in rates.

The Turkish lira gained ground against the USA dollar on Wednesday ahead of Thursday's monetary policy committee meeting of the Turkish Central Bank.

Turkey is battling double-digit inflation, which surged to almost 18 percent in August, and a meltdown in the lira which hit a record low of 7.24 against the USA dollar a month ago.

"The decision did not say what level should be taken for the new contracts, neither identifies what price index will be used for future price hikes, paving the way for potential disputes between the sides (of a contract)" said Cem Baslevent, economics professor at Istanbul Bilgi University.

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He has repeatedly blamed the central bank for high inflation, which hit nearly 18% last month, its highest level since 2003.

Benchmark 10-year Treasury notes briefly hit the psychologically significant 3 percent level for the first time in more than a month as prices on US government bonds fell on economic data that seems solid enough to support plans by the Federal Reserve to raise rates another two times in 2018.

The central bank said it would keep high rates until inflation eases. In August, the bank tightened liquidity to counter the lira's slide, shifting funding from repo auctions to the upper band of its interest rate corridor - raising the effective cost of funding by 150 basis points to 19.25 per cent. "If you say 'inflation is cause, the rate is the result", you do not know this business, friend, ' he added. "I just get the sense this week we are beginning to see some light through the clouds".

The US hit two Turkish ministers with sanctions over the detention of US pastor Andrew Brunson and President Donald Trump doubled steel and aluminium tariffs on Turkey.

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