Turkey central bank surprises markets with big rate hike

Turkey central bank surprises markets with big rate hike

Turkey central bank surprises markets with big rate hike

The Monetary Policy Committee led by Governor Murat Cetinkaya on Thursday increased the one-week repo rate by 625 basis points to 24 per cent, more than the median estimate in a Bloomberg survey that called for a hike of 325 basis points.

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".

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

Turkey has in recent weeks been battling through one of the most troubled periods for its economy under the rule of President Recep Tayyip Erdogan, with the lira battered on currency markets in August.

The next two Monetary Policy Committee meetings are to be held in October. The depreciation has fueled higher import costs, contributing to an inflation rate that is more than three times the central bank's target, and many investors are calling for a large increase in borrowing costs to put an end to the rout.

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

The move comes as Turkey's currency has lost nearly a third of its value against the dollar since January.

The main share index rose 2.1 per cent, with the banking index up 4.8 per cent. Dollar-denominated bonds issued by the Turkish government rose across the curve. And on the morning of the rate hike decision, Erdogan was busy. "A rate hike would be an important step to restore market confidence in the lira. If you say "inflation is cause, the rate is the result", you do not know this business, friend", he added.

As well as being seen to undermine the independence of the central bank, Erdogan in July stunned markets by appointing his son-in-law Berat Albayrak as finance minister.

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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Erdoğan has always been pressuring the bank to keep interest rates low to encourage economic growth.

"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.

He said Turkey also needed to resolve a dispute with the United States, which helped drive the lira to a record low of 7.24 against the dollar a month ago, and rebalance the economy away from big infrastructure projects and consumer spending.

He repeated however, his belief that interest rates should be cut, calling them an "instrument for exploitation".

The lira is down 38% against the dollar this year despite Thursday's slim gain.

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