Turkish central bank raises rates sharply, boosts lira

Soc Gen exchange rate forecast for EURUSD

Turkey ruled on Thursday that property sales, rental contracts and leasing transactions must be made in lira from now on, halting the use of foreign currencies for such deals in a fresh step to support the ailing local currency.

The Turkish central bank on Thursday hiked the one week repo auction rate 625 basis points from 17.75 per cent to 24 per cent, significantly higher than the Bloomberg consensus of 21 per cent.

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

However, the property and construction market has become a concern for investors anxious that Turkish companies that borrowed heavily to profit from a boom may struggle to repay loans in foreign currencies, as the weakened lira means there is now more to pay back.

Economists have argued the nominally independent bank has come under pressure from Erdogan who, only a couple of hours before its decision, launched a blistering attack on the bank and interest rates.

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

It said the policy would be "maintained decisively until inflation outlook displays a significant improvement".

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


Neil Wilson, chief market analyst at Markets.com said: "This was a definite statement from policymakers, but the risk now is that the market tries to test the central bank's resolve: the horse may have already bolted".

He earlier charged the bank with failing to control inflation and again aired his unorthodox view that low rates bring inflation down.

The interest rate decision will be announced at 1100 GMT.

The central bank said it was returning to funding via one-week repos from Friday, having funded the market at an overnight lending rate of 19.25 percent for the last month.

"Obviously, it will have negative consequences on the economy but, I would say, it is less important if you have a hard landing than big corporate defaults due to a vicious cycle between (lira) depreciation and inflation", he said.

However, a diplomatic row with the United States and concerns about the president's influence on monetary policy have eroded investor confidence in Turkey in recent months.

The revamp was the latest in a series of steps Erdogan has taken to assume new powers since he won a presidential election in June, heralding the move to an executive presidency which grants sweeping authority.

A growing crisis became acute earlier this year following the detention of an American pastor on espionage and terror-related charges, which prompted Donal Trump to double the import tariffs on Turkish steel and aluminium.

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