Economy

Turkey stuns market with massive interest rate hike

Turkey stuns market with massive interest rate hike

"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.

"Hiking today does get Turkey on the slow road to recovering some monetary policy credibility, and that is critical".

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

Turkish President Recep Tayyip Erdogan on Wednesday took the wheel of his country's sovereign wealth fund, in his latest attempt to steady an economy in crisis, state media reported.

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

The lira has lost more than 40 per cent of its value this year amid a diplomatic spat with the U.S. and signs of an overheating economy. It has lost around 40 per cent of its value this year.

Erdogan took over as Turkey's first executive president in July with sweeping new powers, including oversight over economic policy and the ability to appoint the central bank governor.

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While the lira's plight has made it "rational to expect at least 1000 basis points" added to interest rates, opposition to higher borrowing costs among Turkish officials made a smaller increase more realistic, Rabobank currency strategist Piotr Matys said before the decision. "Erdogan´s speech. was meant to put distance between himself and the (bank´s) decision".

In one direction it could hear the siren call of investors craving higher interest rates to draw a line in the inflationary sand and stop the lira's collapse. "If you say 'inflation is cause, the rate is the result, ' you do not know this business, friend".

"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".

"The central bank is independent and makes its own decisions", he said. Later the currency rate stabilized around 6.20 with lira's gains at some 2.2 percent.

"It was a big surprise to us, but probably to every Turkey-watcher", said Nora Neuteboom, an economist at ABN Amro, saying the move was a "positive signal" with the bank wanting to show its independence and commitment to fight inflation.

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 also announced all business deals inside the country must now be conducted in lira with only exporters and importers allowed to come into contact with foreign currency.


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