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Abu Dhabi, UAEMonday 24 September 2018

Despite Erdogan's misgivings, Turkey central bank raises interest rates

Decision came even after president repeated his opposition, saying high inflation was a result of the central bank's wrong steps

Turkey's central bank headquarters in Ankara, Turkey. The banks has raised rates. Reuters
Turkey's central bank headquarters in Ankara, Turkey. The banks has raised rates. Reuters

Turkey's central bank raised its benchmark rate by 625 basis points on Thursday in a move that boosted the lira and may ease investor concern about President Tayyip Erdogan's influence on monetary policy.

The bank raised the one-week repo rate to 24 per cent, meaning it has now increased interest rates by 11.25 percentage points since late April, in an attempt to put a floor under the tumbling lira.

The decision came despite Mr Erdogan repeating his opposition to high interest rates earlier in the day, saying high inflation was a result of the central bank's wrong steps. The central bank said deterioration in pricing behaviour continued to pose upside risks on the inflation outlook, despite weaker domestic demand conditions.

"Accordingly, the committee has decided to implement a strong monetary tightening to support price stability," the monetary policy committee statement said.

All 11 economists in a Reuters poll forecast the bank would tighten, but with the rate hike predictions ranging between 225-725 basis points as the bank balances concerns over lira weakness with worries about an economic slowdown. "It is pleasing to see common sense prevail," said Aberdeen Standard Investments Head of Emerging Market Debt, Brett Diment. "Hiking today does get Turkey on the slow road to recovering some monetary policy credibility, and that is critical."

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The lira firmed to 6.01 against the dollar following the decision, from more than 6.4176 beforehand. At 11.22 GMT, it stood at 6.15.

The currency has lost 40 per cent of its value against the dollar this year, hit by concerns about Mr Erdogan's influence on monetary policy and more recently by a diplomatic spat between Turkey and the United States.

Mr Erdogan, a self-described "enemy of interest rates", assumed new powers under an executive presidential system following an election in June and has appointed his son-in-law as finance minister.

The appointment of Berat Albayrak boosted expectations the president - who wants to see lowering borrowing costs to spur credit growth and new construction - will look to exercise greater influence over monetary policy.

In August, annual consumer price inflation hit 17.9 per cent, its highest level since late 2003, prompting the central bank to say it would adjust its monetary stance at the September meeting in the face of "significant risks" to price stability.

Against expectations, the central bank did not raise rates at its last meeting in July. Subsequently, the lira lost some 25 per cent of its value while Turkish authorities have taken a series of steps designed to support the currency, with the central bank taking liquidity measures and the banking watchdog limiting derivative transactions.

Mr 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.

In a decision announced earlier on Thursday, he ruled that property sales and rental agreements must be made in lira, putting an end to such deals in foreign currencies.

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