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Turkey surprises markets with interest rate hike

The rate hike caused Turkey's lira to surge in value [Getty]

Date of publication: 14 September, 2018

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The lira's value jumped on Thursday after Turkey's central bank surprised markets with a bigger than expected interest rate hike.

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

The bank said it was hiking its main interest rate by 625 basis points to 24 percent, double the market consensus for the raise.

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

The lira reacted strongly to the move, rising by 5 per cent in value to 6 lira to the US dollar. It later shed some of those gains but was still up 3 percent in value at 6.14 to the dollar. 

The lira has plunged in recent weeks on concerns over domestic policymaking and a crisis in relations with the US, with the hike aimed at minimising the damage.

"Accordingly, the Committee has decided to implement a strong monetary tightening to support price stability," the central bank said.

Apparently not ruling out further rate hikes, it vowed to "use all available instruments in pursuit of the price stability objective".

A "tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement", it added.

But Erdogan - who has been accused by critics of pressuring the nominally independent central bank - had earlier charged the bank with failing to control inflation and again aired his unorthodox view that low rates bring inflation down.

"As of today I have not seen the central bank fix inflation rates as they promised," Erdogan told a conference in Ankara. 

"Interest rates are the cause, inflation is the result. If you say 'inflation is cause, the rate is the result', you do not know this business, friend," he added.

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

It was not immediately clear if Erdogan had been aware of the central bank's decision when he made his comments.

"The central bank is independent and makes its own decisions," he said.

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