Economy

Turkey expected to hike rates in new test for central bank

Turkey expected to hike rates in new test for central bank

Turkey is putting new government investments on hold as it seeks to rein in spending and halt a slide in the Turkish Lira, President Recep Tayyip Erdoğan has said.

"My sensitivities concerning interest rates are the same, nothing has changed", Erdogan told a meeting of Turkish tradesmen and artisans in Ankara.

The decision came after Turkey's central bank increased interest rates in efforts to stop the declining value of the lira.

Earlier in the day, Erdogan published an executive decree that forces contracts between two entities in Turkey to be made in liras rather than foreign currencies.

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.

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". The central bank said it would keep high rates until inflation eases.

Analysts have called for Turkey to hike its key interest rate by as much as 10% to combat inflation, which is running at 16%.

Earlier, the United States has imposed sanctions on two Turkish government ministers and doubled tariffs on Turkish steel and aluminum imports over the continued detention of American pastor Andrew Brunson on espionage and terror-related charges.

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On Friday, Chinese Foreign Minister Wang Yi said the current world trade system was not ideal and Beijing supported reforms to it, including to the World Trade Organisation, to make it fairer and more effective.

But there had been fears over the health of the Turkish economy - which economists say is heading for a recession after a slowdown in the second quarter of 0.9 percent compared to 1.5 percent in the first quarter of this year.

Currently, the interest rates are below the annual inflation level in Turkey.

"The crucial thing is to restore the confidence of worldwide investors that their policies are on the right track", global economist Eswar Prasad said earlier this month.

He also announced all business deals inside the country must now be conducted in lira with only exporters and importers allowed to come into contact with foreign currency.

Erdogan and his government have cast the lira crisis as an "economic war" against Turkey, repeatedly urging Turks to sell their foreign currency savings to shore up the lira.

With the ban in place, all future sales, rental, and leasing contracts must now be made in the country's own currency, the lira.

But it remains to be seen if the move, like the central bank's greater-than-expected tightening, will be enough to mollify investors, who have helped send the lira TRYTOM=D3 down by 40 percent against the dollar this year.


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