Turkey central bank stuns markets with giant rate hike

Mae Love
September 14, 2018

The bank had not touched interest rates since early June with markets becoming increasingly concerned that the policy of the nominally independent bank is being dictated by Erdogan.

Turkish President Recep Tayyip Erdogan has accused the United States of launching what he called a "heinous economic attack" on Turkey after the national currency lira hit a record low following U.S. sanctions.

The central bank's hefty rate hike on Thursday meant the bank had now increased interest rates by 11.25 percentage points since late April in an attempt to prop up the ailing lira, possibly easing investor concerns over Erdogan's influence on monetary policy.

"We can not allow the use of the tool of exploitation that is interest rates", Erdogan told a meeting in Istanbul on Thursday.

The lira reacted strongly to the decision, rising by five per cent in value to 6.0 lira to the United States dollar.

Since then, he has continued to dismiss calls to raise rates to address Turkey's longtime woes with its currency, the lira.

Before today's interest rate decision, Mr Erdogan announced he was banning the use of foreign currencies in property sales, rental contracts and leasing transactions and ruled all such transactions must now be made in lira.

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Economists have argued the nominally independent bank has come under pressure from Erdogan who, only a couple of hours before its decision, launched a blistering attack on the bank and described interest rates as a "tool of exploitation".

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 worldwide investors.

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

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

Currently, the interest rates are below the annual inflation level in Turkey.

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

A growing crisis became acute earlier this year following the detention of an American pastor on espionage and terror-related charges, which prompted Donal Trump to double the import tariffs on Turkish steel and aluminium.

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