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Turkish lira eases after hefty central bank rate hike

14 September 2018

The Central Bank of the Republic of Turkey (CBRT) raised the rate from 17.75% to 24%, significantly higher than the analysts' consensus of 21%, and in apparent defiance of the president, who has regularly expressed resistance to raising rates.

Turkey has in recent weeks been battling through one of the most troubled periods for its economy under the rule of President Recep Tayyip Erdogan, with the lira battered on currency markets in August.

Turkey's central bank, which described the hike as a "strong monetary tightening to support price stability", had left interest rates untouched since early June, causing markets to question just how independent bank policy was from the country's president.

"If needed, further monetary tightening will be delivered", the bank said in a statement.

Its monetary committee made a decision to "implement strong monetary tightening to support price stability", it said on Thursday, as it raised interest rates by 625 basis points in the face of a spike in inflation and a slump in the lira.

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

The lira firmed to 6.01 against the dollar following the decision, from more than 6.4176 beforehand.

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.

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

The bank's decision was announced hours after Erdogan triggered tumult by repeating his hostility to higher borrowing costs and issuing an order that limited the use of foreign currency in domestic transactions.

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

In 15 years inflation was never in line with central bank targets.

It said the policy would be "maintained decisively until inflation outlook displays a significant improvement". "If you say "inflation is cause, the rate is the result", you do not know this business, friend", he added.

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

Washington has imposed sanctions on two Turkish ministers and doubled tariffs on steel and aluminum imported from the country.

The central bank surprised investors by not raising rates when it last met in July.

Turkish lira eases after hefty central bank rate hike