Turkish interest rate rise brings Erdoganomics down to earth

European Central Bank keeps policy unchanged

European Central Bank keeps policy unchanged

The Turkish lira gained to its strongest level against the dollar this month amid speculation that the central bank will increase interest rates on Thursday to stem double-digit inflation.

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.

Economists have argued the nominally independent bank has come under pressure from Erdogan who, only a couple of hours before its decision, launched a blistering attack on the bank and interest rates.

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

"Hiking today does get Turkey on the slow road to recovering some monetary policy credibility, and that is critical".

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.

"Deterioration in the pricing behaviour continues to pose upside risks on the inflation outlook, despite weaker domestic demand conditions", the bank added.

"Accordingly, the Committee has chose to implement a strong monetary tightening to support price stability", it said. The lira's value leaped on news of the decision.

The Turkish currency lost almost a quarter in value against the dollar in August. "There has been no change in my sensitivities on the issue of interest rates".

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

At a Tehran summit on Friday with his Iranian and Russian counterparts, an agreement was reached to use local currencies for trade deals, Anadolu reported, citing Iran's central bank governor Abdolnaser Hemati.

"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".

The bank´s intervention was the latest aggressive rate hike to calm economic turbulence in an emerging market after the Argentinian central bank´s recent hike from 45 to 60 percent on August 30.

He said Turkey also needed to resolve a dispute with the United States, which helped drive the lira to a record low of 7.24 against the dollar a month ago, and rebalance the economy away from big infrastructure projects and consumer spending.

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