Turkey central bank stuns markets with giant rate hike

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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.

The bank had not touched interest rates since early June with markets concerned that the policy of the nominally independent bank is being dictated by Erdogan.

President Recep Tayyip Erdogan appointed himself chairman of Turkey's sovereign wealth fund and got rid of the entire management staff that had presided over two years of inaction. Such fears have played out in other countries and sent currencies in India, Indonesia and South Africa into recent slides of their own. "What further regulation will follow after this decision is important".

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

The decision also covers contracts for business and services.

The lira rallied 3 per cent to 6.18 against the dollar, having traded at 6.4176 beforehand. The depreciation has fueled higher import costs, contributing to an inflation rate that is more than three times the central bank's target, and many investors are calling for a large increase in borrowing costs to put an end to the rout.

Cem Baslevent, economics professor at Istanbul Bilgi University, said: "The decision did not say what level should be taken for the new contracts, neither identifies what price index will be used for future price hikes, paving the way for potential disputes between the sides of a contract".

"Such hasty decisions would not have a positive impact on the Turkey perception of foreigners either", he added.

"Against this background, the lira's reaction is still surprisingly limited in my opinion".

"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.

Erdoğan has always been pressuring the bank to keep interest rates low to encourage economic growth.

On Thursday, he repeated his call for lower rates.

Turkey's central bank raised its benchmark rate by a hefty 625 basis points on Thursday, the biggest such increase in President Tayyip Erdogan's 15-year rule, boosting the lira and possibly easing investor concern over his influence on monetary policy.

All 11 economists in a Reuters poll had forecast the bank would tighten, with the predictions ranging between 225-725 basis points as it balances concerns over the lira's weakness with worries about a sharp economic slowdown.

"My sensitivities concerning interest rates are the same, nothing has changed", he said.

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