Economy

Turkish interest rate rise brings Erdoganomics down to earth

Turkish interest rate rise brings Erdoganomics down to earth

"Inflation expectations, pricing behavior, lagged impact of recent monetary policy decisions, contribution of fiscal policy to the rebalancing process, and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered", the statement said.

"Erdogan's comments clearly show that he does not support this and it becomes much more hard, if not impossible, for the Turkish central bank to tighten enough to stabilize the lira and get inflation under control", Esther Reichelt, a forex strategist at Commerzbank in Frankfurt, told DW.

The move boosted the lira and may ease investor concern about President Recep Tayyip Erdogan's influence on monetary policy.

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

The next two Monetary Policy Committee meetings are to be held in October. The lira has lost roughly 40 percent of its value against the USA dollar this year, and its inflation rate sits at about 18 percent.

The main refinancing rate, which determines the cost of credit in the economy, remained unchanged at 0.00 percent while the rate on the marginal lending facility - the emergency overnight borrowing rate for banks - remains at 0.25 percent. By way of comparison, the Federal Reserve's much-debated rate hikes earlier this year nudged the rate just fractions of a percentage point to around 2 percent in the U.S. In fact, he calls himself the "enemy of interest rates", and was even pushing for lower rates as recently as Thursday morning.

"The Governing Council expects the key European Central Bank interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary", it said, repeating its guidance.

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The bank said that inflation developments pointed "to significant risks to price stability" due to the recent fall in value of the lira.

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.

Piotr Matys, emerging markets foreign exchange strategist at Rabobank, said the central bank had taken a decisive step which should allow it to gradually restore confidence in the lira.

Analysts say the lira´s plunge last month had been sparked by a combination of concerns over domestic policymaking and a crisis in relations with the United States.

Erdogan took over as Turkey's first executive president in July with sweeping new powers, including oversight over economic policy and the ability to appoint the central bank governor.

That decision sent the lira tumbling by a quarter and prompted Turkish authorities to impose a series of measures meant to support the currency.

On Thursday he ruled that property sales and rental agreements must be made in lira, putting an end to such deals in foreign currencies.