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Forex News: Turkey CB Delivers Massive Rate Hike Despite Erdogan's

Turkey CB Delivers Massive Rate Hike Despite Erdogan's Calls For Cut

09/13/2018 - 08:15:00 (RTTNews)

(RTTNews) - Turkey's central bank raised its key interest rate by a bigger-than-expected volume on Thursday, defying calls from the country's President Tayyip Erdogan for lower rates.

The Monetary Policy Committee, led by Governor Murat Cetinkaya, raised the one-week repo auction rate to 24 percent from 17.75 percent. Economists had expected the rate to be raised to 20.75-22 percent.

The Turksih lira rallied on the news of the rate hike and was trading more than 5 percent above its Wednesday's closing level.

"The fact that the CBRT has taken fairly aggressive action will ease some of the concerns about the erosion of its independence," Capital Economics economist Jason Tuvey said.

"While the CBRT has managed to buy itself some time with today's decision, the gains could be eroded if Erdogan decides to use his much stronger position to reassert his influence over monetary policy decisions and push for interest rates to be lowered," the economist added. Earlier on Thursday, Erdogan said high interest rates are a "tool of exploitation" and the central bank should cut them. The lira fell over 3 percent on his comments.

Erdogan insisted that the central bank remained independent though his views on the link between interest rates and inflation remained unchanged, the Financial Times reported.

"Interest is the cause, inflation is the result," the FT reported Erdogan as saying at a gathering of small business owners in Istanbul.

The TCMB said that recent developments regarding the inflation outlook point to significant risks to price stability.

Price increases have shown a generalized pattern across subsectors, reflecting the movements in exchange rates, the bank said.

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

"Accordingly, the Committee has decided to implement a strong monetary tightening to support price stability."

The central bank also asserted that it will maintain the tight stance in monetary policy "decisively until inflation outlook displays a significant improvement."

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

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