Turkey's Central Bank Defies Erdogan With Drastic Interest Rate Hike

Turkey's Central Bank Defies Erdogan With Drastic Interest Rate Hike

Countering President Recep Tayyip Erdogan, Turkey's central bank raised its benchmark interest rate more than anticipated to stabilize the country's finances.

The lira traded at 6.0723 per dollar, well off its record low of 7.24 reached a month ago.

But Erdogan - who has been accused by critics of pressuring the nominally independent central bank - had earlier charged the bank with failing to control inflation and again aired his unorthodox view that low rates bring inflation down.

The lira has lost 40 percent of its value against the USA dollar this year over concerns about Mr Erdogan's influence and a diplomatic spat between Ankara and Washington but firmed to 6.01 following the interest rate decision, from more than 6.4176 beforehand.

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.

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

The bank described the hike as a "strong monetary tightening to support price stability".

The increase, which was higher than expected, boosted the lira by five percent against the dollar and may ease investor concern about Erdogan's influence on monetary policy.

Neil Wilson, chief market analyst at Markets.com said: "This was a definite statement from policymakers, but the risk now is that the market tries to test the central bank's resolve: the horse may have already bolted".

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

It said the policy would be "maintained decisively until inflation outlook displays a significant improvement".

Guillaume Tresca, senior emerging market strategist at Credit Agricole said the economy needed to slow down because it was overheating and that an interest rate rise was needed to cap lira depreciation.

Key rates are now at their highest level since 2004, around a year after Erdogan first came to power.

"If you think inflation is the cause and interest rates are the result, it means you don't know about this matter, my friend".

The bank later said funding would be provided via the policy rate, the one week repo auction rate, instead of through overnight lending from September 14.

"The bold decision (by Turkey's central bank) reduces the risk that a full-scale financial crisis may unfold", wrote analysts at Rabobank in a note to clients.

Last month, the USA imposed sanctions on two Turkish government ministers and also imposed tariffs on imports of Turkish steel and aluminium in a bid to pressure Turkey to release Brunson.

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