Economy

Turkey's central bank raises interest rate to 24%

Turkey's central bank raises interest rate to 24%

The bank had not touched interest rates since early June with markets becoming increasingly concerned that the policy of the nominally independent bank is being dictated by Erdogan.

"Turkey's Wealth Fund has appointed President Recep Tayyip Erdogan as its new chairman, according to a notification in the Official Gazette", state news agency Anadolu said.

The Monetary Policy Committee led by Governor Murat Cetinkaya on Thursday increased the one-week repo rate by 625 basis points to 24 per cent, more than the median estimate in a Bloomberg survey that called for a hike of 325 basis points.

The central bank said deterioration in pricing behaviour continued to pose upside risks on the inflation outlook, despite weaker domestic demand conditions.

Its monetary committee made a decision to "implement strong monetary tightening to support price stability", it said on Thursday, as it raised interest rates by 625 basis points in the face of a spike in inflation and a slump in 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 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. Erdoğan has always been pressuring the bank to keep interest rates low to encourage economic growth.

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TRT World's Turkey analyst Yusuf Erim has more.

Inflation also soared this month to a 15-year high of nearly 18%.

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 interest rates. The rate hit the lowest level in two weeks.

"Interest rates are the cause, inflation is the result. If you say "inflation is cause, the rate is the result", you do not know this business, friend", he added. They increased the cost of cash to commercial lenders by around 150 basis points last month by forcing them to use a borrowing tool costlier than the one-week repo rate.

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.

"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.