Turkey boosts lira as central bank surprises markets with big rate hike

Turkey boosts lira as central bank surprises markets with big rate hike

It stood at 6.4550 against the dollar at 1012 GMT, weakening sharply from Wednesday's close after Erdogan said high inflation was a result of the central bank's wrong steps.

The bank is expected to raise interest rates on September 13.

The bank said on Thursday that inflation developments pointed "to significant risks to price stability" due to the recent fall in value of the lira.

The magnitude of the hike was all the more surprising given that just before the decision Erdogan had slammed interest rates as a "tool of exploitation".

Thursday's decree, which was published in the government's official gazette, says all current agreements in the property sector made in foreign currencies must be changed within 30 days.

Earlier on Thursday, President Recep Tayyip Erdoğan said his sensitivity regarding high interest rates remained the same, but added that the Central Bank was independent in its decisions.

"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.

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

The lira has lost roughly 40 percent of its value against the US dollar this year, and its inflation rate sits at about 18 percent. Late last month, South America's second-largest economy saw that rate jump to a staggering 60 percent in a bid to ease investor fears.

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But Neuteboom of ABN Amro said much more was needed for Turkey to turn around "the negative spiral" the economy is in.

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

"Erdogan's comments clearly show that he does not support this and it becomes much more hard, if not impossible, for the Turkish central bank to tighten enough to stabilize the lira and get inflation under control", Esther Reichelt, a forex strategist at Commerzbank in Frankfurt, told DW.

Currently, the interest rates are below the annual inflation level in Turkey. And on the morning of the rate hike decision, Erdogan was busy.

The bank implemented what economists described as a hidden interest rate hike in mid-August, forcing banks to borrow at the higher 19.25 per cent through the overnight lending facility.

Turkey's currency crisis has been driven by concerns about Erdogan's influence on monetary policy, but also more recently by the country's diplomatic row with the United States.

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.

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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