Turkey central bank stuns markets with giant rate hike

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"If wished, extra monetary tightening will be delivered", the bank stated in an announcement. Growth slowed to an annual rate of 5.2% in the second quarter, from the first quarter's 7.4%.

The bank had faced a dilemma, and still does. Facing a deep slide in the lira and a steep run higher in inflation, the central bank felt compelled to lift rates to restore investor confidence-a risky gambit that boosted the lira but could further damage the economy. And most analysts predict the Turkish economy is heading into a recession.

He was speaking in a televised address after the decree on contracts was published and before the rate decision was announced. Subsequently, the lira lost about 25 percent of its value while Turkish authorities have taken a series of steps created to support the currency, with the central bank taking liquidity measures and the banking watchdog limiting derivative transactions.

The revamp was the latest in a series of steps Erdogan has taken to assume new powers since he won a presidential election in June, heralding the move to an executive presidency which grants sweeping authority.

The unexpected magnitude of the massive jump from the previous rate of 17.5% seems to have been forced on TCMB by weeks of pressure from nervous worldwide investors fretting over the dismal state of the economy, and the pervasive weakness of the Turkish lira. He forecast the one-week repo rate would be raised to 21 per cent because of the weakening lira and deteriorating inflation outlook. "If you say 'inflation is cause, the rate is the result, ' you do not know this business, friend".

The central bank confounded expectations for a rate increase at its July meeting, fuelling the belief it is under pressure from Erdogan, who has called interest rates the "mother and father of all evil" and frequently urges they be kept low. "OK, they raised interest rates, but what happens?" "By saying the central bank is independent while criticizing it for misguided policies, Erdogan is pointing the finger of blame at the central bank".

The currency has lost 40 percent of its value against the dollar this year, hit by concerns about Erdogan´s influence on monetary policy and more recently by a diplomatic row between Turkey and the United States.

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The two-year yield, sensitive to expectations of higher Fed fund rates, touched 2.7611 percent compared with a USA close of 2.756 percent.

Turkish President Recep Erdogan on Thursday said interest rates are a "tool of exploitation" and called for low interest rates.

Turkey is involved in a diplomatic standoff with the U.S. over the detention of an American evangelical pastor.

'Accordingly, the Committee has made a decision to implement a strong monetary tightening to support price stability, ' it added, explaining the hike.

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

The lira crisis has spread to some other emerging market countries with weak economic fundamentals such as sizable current account deficits.

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