Turkey central bank raises benchmark rate to 24%; lira rallies

Turkey central bank raises benchmark rate to 24%; lira rallies

Turkey's central bank surprised markets on Thursday with a bigger than expected rate hike to battle soaring inflation and boost the lira, prompting the embattled currency to surge in value.

The lira has lost more than 40 per cent of its value this year amid a diplomatic spat with the USA and signs of an overheating economy.

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.

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

Several emerging markets have confronted the same struggles, dogged by a strengthening US dollar that makes it more hard for countries such as Turkey to pay back hefty external debt.

The lira rallied 3 per cent to 6.18 against the dollar, having traded at 6.4176 beforehand.

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

"However, one swallow doesn't make a summer", she warned.

On Thursday he ruled that property sales and rental agreements must be made in lira, putting an end to such deals in foreign currencies.

Brett Diment at Aberdeen Standard Investments said raising rates would put "Turkey on the slow road to recovering some monetary policy credibility, and that is critical".

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Against expectations, the central bank did not raise rates at its last meeting in July.

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

"Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement".

TRT World's Turkey analyst Yusuf Erim has more.

"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".

There had been indications from Turkey's central bank that it would raise rates, after inflation came in at almost 18% in August, according to official data.

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

Currently, the interest rates are below the annual inflation level in Turkey. The rate hike could squeeze growth further, but independent experts say it is needed to contain inflation of about 18% and support the currency.

The bank later said on Twitter that funding would be provided via the policy rate, the one week repo auction rate, instead of through overnight lending from September 14.

He criticised the central bank, saying it had consistently miscalculated inflation targets and again portrayed the currency crisis as a foreign conspiracy.

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