Turkish central bank raises benchmark rate sharply, boosts lira

Jeannie Matthews
September 16, 2018

President Recep Tayyip Erdogan appointed himself chairman of Turkey's sovereign wealth fund and got rid of the entire management staff that had presided over two years of inaction.

The lira has lost more than 40 percent of its value this year on the back of investor concerns about Erdogan's influence on monetary policy and an ongoing row with the United States that has resulted in reciprocal sanctions and trade restrictions. Rising U.S. interest rates have discouraged the riskier reach for yield, deepening home-grown crises.

The central bank's move makes Turkey's interest rate one of the highest in the world.

The central bank had drawn sharp criticism for failing to substantially raise interest rates to rein in double-digit inflation and an ailing currency.

Erdogan, who has called interest rates "evil", said during a meeting in Ankara that he remains opposed to high-interest rates.

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.

Last month, the USA imposed sanctions on two Turkish government ministers and also imposed tariffs on imports of Turkish steel and aluminium in a bid to pressure Turkey to release Brunson.

"The commercial banks were probably switching to more liquid assets, given what has happened to the lira", Jason Tuvey, a senior emerging markets economist at Capital Economics in London said by phone on Friday.

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On Friday, Chinese Foreign Minister Wang Yi said the current world trade system was not flawless and Beijing supported reforms to it, including to the World Trade Organisation, to make it fairer and more effective.

The bank had not touched interest rates since early June with markets concerned that the policy of the nominally independent bank is being dictated by Erdogan.

"If wished, extra monetary tightening will be delivered", the bank stated in an announcement.

Erdogan believes high rates equals high inflation, going against economic orthodoxy.

Economists have warned of a possible recession in Turkey after a slowdown in the second financial quarter of 0.9 percent, compared to 1.5 percent in the first quarter of this year.

The Turkish lira gained ground against the USA dollar on Wednesday ahead of Thursday's monetary policy committee meeting of the Turkish Central Bank.

Turkish companies sit on a net foreign-exchange shortfall of $216 billion, and analysts say they are likely to view any bouts of lira strength as an opportunity to rebuild their dollar reserves, slowing any gains. In a bid to shore up the Turkish lira, Erdoğan's government issued a decree on Thursday banning the use of foreign currency in the sale and renting of property and the leasing of vehicles.

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