Turkey’s central bank stuns markets with huge rate hike

Ankara : Turkey’s central bank yesterday surprised markets with a bigger than expected 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 per cent, double the market consensus for the raise. 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”.

The monetary policy committee of the bank said the one-week repo rate was being lifted to 24pc from 17.75pc, the first rate hike since June. The lira reacted strongly to the decision, rising by five percent in value to 6.0 lira to the US dollar. It later shed some of those gains but was still up 3.0 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 United States. The bank said that inflation developments pointed “to significant risks to price stability” due to the recent fall in value of the lira.

“Deterioration in the pricing behaviour continues to pose upside risks on the inflation outlook, despite weaker domestic demand conditions. “Accordingly, the Committee has decided to implement a strong monetary tightening to support price stability,” it added, explaining the hike. Apparently not ruling out further rate hikes, it vowed to “use all available instruments in pursuit of the price stability objective”. But Erdogan had earlier charged the bank with failing to control inflation and again aired his unorthodox view that low rates bring inflation down.