Turkey central bank surprises markets with big rate hike

Erdogan appoints himself chairman of Turkey’s sovereign wealth fund

Erdogan appoints himself chairman of Turkey’s sovereign wealth fund

The lira was trading around 6.100 on Friday, a day after the Central Bank of the Republic of Turkey (CBRT) announced the biggest hike in its benchmark interest rate in more than a decade, to 24 percent.

Recep Tayyip Erdogan, who defines himself as an "enemy of the interest", wishes to keep the interest rates low in order to keep the boom of economic growth fueled by lending.

The lira has lost 40 percent of its value against the United States 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. It had earlier risen as much as half a percent on the day, touching its highest since September 4.

The slump in the lira has been driven by concerns about Erdogan's influence on monetary policy, and more recently a bitter row with the United States that saw the North Atlantic Treaty Organisation allies impose reciprocal trade restrictions and sanctions on each other.

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Relations with the U.S. deteriorated last month after Washington imposed sanctions on two Turkish ministers over the detention of an American pastor and President Donald Trump doubled steel and aluminium tariffs on Turkey. South Africa, Indonesia and Mexico are also among a group of emerging market economies that have seen their currencies tumble as investors desert countries that have grown quickly using large amounts of borrowed funds in favour of safer havens.

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

In his speech on Friday, Erdogan said Turkey would see the result of central bank's independence after it lifted interest rates, adding that his patience with interest rates had limits.

Phoenix Kalen, director of EM strategy at Societe Generale, said the market was both pleased and confused by the bank move. He said the sector had US$15 billion in debt and that 70 per cent of all shopping mall rent contracts were priced in foreign currency. This as inflation was up to nearly 18 percent in August, its highest since September 2003 - the year Erdogan first took power as prime minister.

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The Turkish currency has plunged some 40 percent against the dollar this year while annual inflation has jumped to almost 18 percent and economic growth has slowed to an annual rate of 5.2 percent. "Any sign that he will try to reassert his influence over monetary policy decisions could quickly cause market sentiment to deteriorate again".

"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.

"My sensitivities concerning interest rates are the same, nothing has changed", Erdogan told a meeting of Turkish tradesmen and artisans in Ankara.

He criticized private banks, saying some of them raised interest rates to 50%.

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