Erdogan decree bans foreign currency property sales in Turkey

Soc Gen exchange rate forecast for EURUSD

Soc Gen exchange rate forecast for EURUSD

"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.

There had been indications from the bank that it would raise rates after inflation came in at almost 18 percent in August.

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

The hefty 6.25 percentage point rise is the bank's latest attempt to stem the currency's collapse.

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.

With Thursday's decision, the ECB's rate on bank overnight deposits, which is now its primary interest rate tool, remains at -0.40 percent.

Phoenix Kalen, director of EM strategy at Societe Generale, said the market was both pleased and confused by the bank move.

TRT World's Turkey analyst Yusuf Erim has more.

Piotr Matys, emerging markets foreign exchange strategist at Rabobank, said the central bank had taken a decisive step which should allow it to gradually restore confidence in the lira.

The bank is also fighting a losing battle against inflation with annual consumer price inflation hitting 17.9 percent last month, its highest level since late 2003.

Addressing a meeting of Turkish tradespeople in Ankara on Thursday, before the rate decision was announced, Erdoğan said the central bank is independent and takes its own decisions.

"Interest rates are the cause, inflation is the result". The rate hike could squeeze growth further, but independent experts say it is needed to contain inflation of about 18% and support the currency.

Anthony Skinner, director of Middle East and North Africa at Verisk Maplecroft, told AFP he believed the hike had already been agreed. But it still expects to end its 2.6 trillion euro asset purchase scheme by the end of the year, suggesting that a formal decision on ending quantitative easing will come later.

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 per cent for the last month. 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.

The sense of doom was compounded on August 1, when the U.S. imposed selective sanctions on Turkey over the detainment of an American pastor.