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

Galtero Lara
Setiembre 14, 2018

The independence of monetary policy has been in doubt since Erdogan pledged in his election campaign this year to take on a greater role to bring interest rates lower.

Turkish President Tayyip Erdogan has appointed himself chairman of the country's sovereign wealth fund and completely changed its board, naming Finance Minister Berat Albayrak as his deputy, the country's Official Gazette said on Wednesday.

"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", she said. 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 central bank said there was still an upside risk to the inflation outlook from what it called a deterioration in pricing behaviour, despite weaker domestic demand conditions.

"Accordingly, the Committee has made a decision to implement a strong monetary tightening to support price stability", it added, explaining the hike.

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.

There had been indications from the bank that it would raise rates after inflation came in at almost 18 per cent in August, according to official data last week.

Since then, he has continued to dismiss calls to raise rates to address Turkey's longtime woes with its currency, the lira.

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TRT World's Turkey analyst Yusuf Erim has more.

Earlier in the day, Erdogan had launched a blistering attack on the central bank, causing a sharp fall in the value of the lira just ahead of the crucial rate decision.

Ignoring calls for restraint from President Recep Tayyip Erdoğan, the bank raised its main short-term rate from 17.5% following weeks of pressure from worldwide investors.

In another bid to prop up the lira, Erdogan earlier on Thursday ordered by decree that property agreements in foreign currencies would not be allowed.

The embattled currency has fallen by 40% this year amid a lack of interest rate hikes to control inflation.

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

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

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