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techkenyot.com April 18, 2019


Turkey raises interest rates to 24% in new bid to boost lira

14 September 2018, 02:44 | Hattie Nash

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

The president will oversee financing for large state development projects

Turkish Central Bank on Thursday hiked its one-week repo rate by 625 base points.

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

Erdogan again described interest rates as a "tool of exploitation" but vowed that "we can not be taken advantage of".

"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.

Before today's interest rate decision, Mr Erdogan announced he was banning the use of foreign currencies in property sales, rental contracts and leasing transactions and ruled all such transactions must now be made in lira.

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The Central Bank of the Republic of Turkey (CBRT) raised the rate from 17.75% to 24%, significantly higher than the analysts' consensus of 21%, and in apparent defiance of the president, who has regularly expressed resistance to raising rates.

It said: "Accordingly, the committee has chose to implement a strong monetary tightening to support price stability".

It vowed the tight stance in monetary policy would be "maintained decisively until inflation outlook displays a significant improvement".

The Turkish lira began to recover shortly after the rate hike, strengthening by 3% to 6.16 against the dollar.

"Turkey needs structural reforms to increase productivity, to decrease its dependence on short-term portfolio flows and to decrease the rigidness in the labour market".

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Turkish President Recep Tayyip Erdogan has railed against interest rates as "the mother and father of all evil" and believes that high rates lead to high inflation.

Currently, the interest rates are below the annual inflation level in Turkey. "If you say ´inflation is the cause, the rate is the result´, you do not know this business, friend", he added. "Erdogan´s speech. was meant to put distance between himself and the (bank´s) decision". In one direction it could hear the siren call of investors craving higher interest rates to draw a line in the inflationary sand and stop the lira's collapse.

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 United States and China.

Washington has imposed sanctions on two Turkish ministers and doubled tariffs on steel and aluminum imported from the country.

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