Turkey central bank surprises markets with big rate hike

Turkish lira gains value against US dollar

The hefty 6.25 percentage point rise is the bank's latest attempt to stem the currency's collapse.

The central bank hiked the one week repo auction rate 625 basis points from 17.75 percent to 24 percent, significantly higher than the Bloomberg consensus of an increase to 21 percent.

The monetary policy committee said deterioration in pricing behaviour continued to pose upside risks on the inflation outlook, despite weaker domestic demand conditions.

While the lira's plight has made it "rational to expect at least 1000 basis points" added to interest rates, opposition to higher borrowing costs among Turkish officials made a smaller increase more realistic, Rabobank currency strategist Piotr Matys said before the decision. The rate hike could squeeze growth further, but independent experts say it is needed to contain inflation of about 18% and support the currency.

TRT World's Turkey analyst Yusuf Erim has more.

The lira reacted strongly to the rate rise, initially up 5% in value to 6.0 lira to the U.S. dollar, later settling up more than 2.7% at 6.15 to the dollar.

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The currency has plunged in recent months and even after Thursday's rise was down nearly 39% against the dollar this year. At 1122 GMT, it stood at 6.15. 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 next two Monetary Policy Committee meetings are to be held in October.

Turkish President Recep Tayyip Erdogan has railed against interest rates as "the mother and father of all evil" and believes that high rates lead to high inflation.

Turkey's central bank today surprised markets with a bigger than expected rate hike to battle soaring inflation and boost the lira, prompting the embattled currency to surge in value. Subsequently, the lira lost some 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.

"For a country that is in really deep distress like Turkey, what is important is to restore some of the independence of the central bank and take measures to stem the currency's fall".

Countering a trend popular within Turkey, especially within the retail sector, the government said any contracts previously made in foreign currency but which were now in effect must be converted into lira within 30 days.

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