Turkey’s central bank hikes key interest rate to 24 percent

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Its monetary committee decided to “implement strong monetary tightening to support price stability,” it said on Thursday, as it raised interest rates by 625 basis points in the face of a spike in inflation and a slump in the lira.

According to Anadolu Agency's survey on Monday, a group of 17 economists expected a rise in one-week repo rate with a median of 425 base points, ie 4.25 percentage points.
According to Anadolu Agency’s survey on Monday, a group of 17 economists expected a rise in one-week repo rate with a median of 425 base points, ie 4.25 percentage points. (AA)

The Central Bank of Turkey on Thursday said it was hiking its main interest rate by 625 basis points. The move boosted the lira and may ease investor concern about President Recep Tayyip Erdogan’s influence on monetary policy.

The monetary policy committee of the bank said the one-week repo rate was being lifted to 24 percent from 17.75 percent, the first rate hike since June.

“Accordingly, the Committee has decided to implement a strong monetary tightening to support price stability,” the monetary policy committee statement said.

The bank has now increased interest rates by 11.25 percentage points since late April, in an attempt to put a floor under the tumbling lira.

The central bank said deterioration in pricing behaviour continued to pose upside risks on the inflation outlook, despite weaker domestic demand conditions.

“If needed, further monetary tightening will be delivered,” the bank said in a statement.

TRT World’s Turkey analyst Yusuf Erim has more.

Lira to the dollar

The lira reacted strongly to the decision, rising by five percent to the US dollar.

The lira firmed to 6.01 against the dollar following the decision, from more than 6.4176 beforehand. At 1122 GMT, it stood at 6.15.

The lira had lost 40 percent of its value against the dollar this year, hit by concerns about monetary policy and, more recently, a diplomatic spat between Turkey and the United States.

The next two Monetary Policy Committee meetings are to be held in October.

Inflation

In August, annual consumer price inflation hit 17.9 percent, its highest level since late 2003, prompting the central bank to say it would adjust its monetary stance at the September meeting in the face of “significant risks” to price stability.

Against expectations, the central bank did not raise rates at its last meeting in July.  Subsequently, the lira lost some 25 percent of its value while Turkish authorities have taken a series of steps designed to support the currency, with the central bank taking liquidity measures and the banking watchdog limiting derivative transactions.

TRT World journalist Mobin Nasir has the latest on the Turkish central bank’s decision to increase interest rates to 24 percent.

Erdogan has cast the lira crisis as an ‘economic war’ targeting Turkey, repeatedly urging Turks to sell their dollar savings to shore up the lira.

In a decision announced earlier on Thursday, he ruled that property sales and rental agreements must be made in lira, putting an end to such deals in foreign currencies.

Source: TRTWorld and agencies