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

Soc Gen exchange rate forecast for EURUSD

The rate rise comes on the same day as the Bank of England left the interest rate untouched at 0.75%, citing heightened risks to global growth as a result of volatility within emerging markets, as well as tensions between the USA and China.

Turkey ruled on Thursday that property sales, rental contracts and leasing transactions must be made in lira from now on, halting the use of foreign currencies for such deals in a fresh step to support the ailing local currency.

The central bank hiked the one week repo auction rate 625 basis points from 17.75 percent to 24 percent, significantly higher than the Bloomberg consensus of an increase to 21 percent.

On Thursday, the Turkish Central Bank exercised that independence - and appeared to reassure investors in the process.

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

Thursday's decree and Erdogan's remarks come after the lira's drastic fall in value against the USA dollar last month, during one of the worst diplomatic rows between North Atlantic Treaty Organisation allies Washington and Ankara.

It also said that the "tight stance in monetary policy" would continue until further improvement in the inflation outlook.

TRT World's Turkey analyst Yusuf Erim has more.

The central bank surprised investors by not raising rates when it last met in July.

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"Turkey needs structural reforms to increase productivity, to decrease its dependence on short-term portfolio flows and to decrease the rigidness in the labour market".

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".

"It nearly seems like it's a game of "good cop, bad cop" being played out between the Turkish authorities - with President Erdogan on the one hand still making statements regarding his dislike of interest rates and. a very sizeable reaction from the central bank in response to the recent inflationary and geopolitical developments".

Anthony Skinner, director of Middle East and North Africa at Verisk Maplecroft, told AFP he believed the hike had already been agreed. And on the morning of the rate hike decision, Erdogan was busy.

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.

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.

"Great decision - made all the more hard by the huge pressure on the central bank from Erdogan", said Bluebay Asset Management LLC strategist Tim Ash.

The US hit two Turkish ministers with sanctions over the detention of US pastor Andrew Brunson and President Donald Trump doubled steel and aluminium tariffs on Turkey.

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