Turkish interest rate rise brings Erdoganomics down to earth

The president will oversee financing for large state development projects

The president will oversee financing for large state development projectsMURAT KULA REUTERS

The bank's decision was announced hours after Erdogan triggered tumult by repeating his hostility to higher borrowing costs and issuing an order that limited the use of foreign currency in domestic transactions.

Since then, he has continued to dismiss calls to raise rates to address Turkey's longtime woes with its currency, the lira.

"Accordingly, the Committee has chose to implement a strong monetary tightening to support price stability", the monetary policy committee statement said.

The bank's Monetary Policy Committee raised the one-week repo rate to 24 per cent, meaning it has now increased interest rates by 11.25 percentage points since late April in an attempt to put a floor under the tumbling currency.

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.

The lira reacted strongly to the rate rise, initially up 5% in value to 6.0 lira to the United States dollar, later settling up more than 2.7% at 6.15 to the dollar.

The lira is down 38% against the dollar this year despite Thursday's slim gain.

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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".

Neil Wilson, chief market analyst at Markets.com said: "This was a definite statement from policymakers, but the risk now is that the market tries to test the central bank's resolve: the horse may have already bolted". The rate hit the lowest level in two weeks.

In another bid to prop up the lira, Erdogan earlier on Thursday ordered by decree that property agreements in foreign currencies would not be allowed. "A rate hike would be an important step to restore market confidence in the lira".

"Interest rates are the cause, inflation is the result". And on the morning of the rate hike decision, Erdogan was busy. "If you say 'inflation is cause, the rate is the result, ' you do not know this business, friend".

The rate rise comes on the same day as the Bank of England left the interest rate untouched at 0.75%, citing heightened risks to global growth as a result of volatility within emerging markets, as well as tensions between the U.S. and China.

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.

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