Turkey stuns market with massive interest rate hike

13 Septembre, 2018, 19:52 | Auteur: Auguste Feret
  • EUR  USD daily chart on verge of extending leg higher

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.

Aberdeen Standard Investments Head of Emerging Market Debt, Brett Diment, said: "It is pleasing to see common sense prevail".

"Deterioration in the pricing behaviour continues to pose upside risks on the inflation outlook, despite weaker domestic demand conditions", the bank added.

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

President Recep Tayyip Erdogan on Wednesday appointed himself the chairman of Turkey's sovereign wealth fund and named his son-in-law and Finance Minister Berat Albayrak as deputy chairman.

The lira firmed to 6.01 against the dollar following the decision, from more than 6.4176 beforehand.

The move comes as Turkey's currency has lost nearly a third of its value against the dollar since January.

The main share index rose 2.1 percent, with the banking index up 4.8 percent.

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The central bank said it was returning to funding via one-week repos from Friday, having funded the market at an overnight lending rate of 19.25 percent for the last month.

Erdogan previous year said the fund needed a "reorganisation" after the first chairman Mehmet Bostan was removed from his post in September 2017. Erdoğan has always been pressuring the bank to keep interest rates low to encourage economic growth.

It was not immediately clear if Erdogan had been aware of the central bank's decision when he made his comments. "If you say "inflation is the cause, the rate is the result", you do not know this business, friend", he added.

"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.

There had been indications from the bank that it would raise rates after inflation came in at almost 18 per cent in August, according to official data last week. Subsequently, the lira lost some 25 percent of its value while Turkish authorities have taken a series of steps created to support the currency, with the central bank taking liquidity measures and the banking watchdog limiting derivative transactions.

Earlier in the day, Erdogan published an executive decree that forces contracts between two entities in Turkey to be made in liras rather than foreign currencies.

Erdogan, a self-styled "an enemy of interest rates", has cast the lira crisis as an "economic war" targeting Turkey and has repeatedly urged Turks to sell their dollar savings to shore up the lira.

Conseillé:

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    It said: "Accordingly, the committee has chose to implement a strong monetary tightening to support price stability". The lira reacted strongly to the decision, rising by five per cent in value to 6.0 lira to the United States dollar.
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