Turkey's Central Bank Defies Erdogan With Drastic Interest Rate Hike

Kenny Grant
September 14, 2018

The central bank hiked the one week repo auction rate 625 basis points from 17.75 percent to 24 percent, significantly higher than the Bloomberg consensus of an increase to 21 percent.

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.

The magnitude of the hike was all the more surprising given that just before the decision President Recep Tayyip Erdogan had slammed interest rates as a "tool of exploitation".

"We can not allow the use of the tool of exploitation that is interest rates", Erdogan told a meeting in Istanbul on Thursday.

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

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

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

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

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The Turkish lira has lost more than 75% of its value against the dollar since January, pushing up the cost of a wide variety of goods.

Following the news, the Turkish lira rose 5 percent in value against the United States dollar, reversing its 42-percent fall this year against the American currency.

The main share index rose 2.1 per cent, with the banking index up 4.8 per cent. Dollar-denominated bonds issued by the Turkish government rose across the curve.

Erdogan past year said the fund needed a "reorganisation" after the first chairman Mehmet Bostan was removed from his post in September 2017.

Guillaume Tresca, senior emerging market strategist at Credit Agricole said the economy needed to slow down because it was overheating and that an interest rate rise was needed to cap lira depreciation.

The bank said on Thursday that inflation developments pointed "to significant risks to price stability" due to the recent fall in value of the lira.

"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.

"It nearly seems like it's a game of "good cop, bad cop" being played out between the Turkish authorities - with President Erdogan on the one hand still making statements regarding his dislike of interest rates and. a very sizeable reaction from the central bank in response to the recent inflationary and geopolitical developments". "A rate hike would be an important step to restore market confidence in the lira".

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