Turkey central bank stuns markets with giant rate hike

Turkey central bank stuns markets with giant rate hike

Turkey central bank stuns markets with giant rate hike

However, a diplomatic row with the United States and concerns about the president's influence on monetary policy have eroded investor confidence in Turkey in recent months.

US producer prices unexpectedly fell in August, recording their first drop in 1-1/2 years and denting talk of accelerating inflation following last week's strong jobs and wage data.

Only hours before the central bank decision, Erdogan again voiced his opposition to increasing interest rates.

Earlier Wednesday, the US dollar/Turkish lira exchange rate stood at 6.4440 as of 9.30 a.m. local time (0630GMT).

Nora Neuteboom, an economist at ABN Amro, said the bank's statement indicated a rate rise of around 200 to 250 basis points (2.0 to 2.5 percentage points) was to be expected but no more.

He has repeatedly blamed the central bank for high inflation, which hit nearly 18% last month, its highest level since 2003. The bank 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.

Independent experts say Turkey should increase rates to help stem the selling pressure on the currency, as higher returns would entice worldwide investors.

Washington imposed sanctions on two government ministers and doubled tariffs on steel and aluminum imports from Turkey.

Istanbul-based economist Ozlem Derici Sengul said investors were anxious about the central bank not being able to take such action due to political pressure, so "the move built credibility".

All current agreements in the property sector made in foreign currencies must be changed within 30 days.

"The next thing to watch will be the reaction of President Erdogan", said Jason Tuvey, senior emerging markets economist at Capital Economics.

The bank also has to balance concerns over slipping growth, which, although a robust 5.2 percent in the second quarter on an annual comparison, showed signs of weakness with some analysts predicting Turkey is heading for recession.

Erdogan, a self-described "enemy of interest rates", assumed new powers under an executive presidential system following an election in June and has appointed his son-in-law as finance minister.

"As of today I have not seen the central bank fix inflation rates as they promised", Erdogan told a conference in Ankara.

Financial markets have always been concerned about Erdogan's control over monetary policy, which they say has undermined the central bank's ability to fight inflation, now at 18 percent.

Erdogan and his government have cast the lira crisis as an "economic war" against Turkey, repeatedly urging Turks to sell their foreign currency savings to shore up the lira.

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.