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Turkey's central bank raises interest rate to 24%

13 September 2018

Turkish lira gained ground against the USA dollar on Thursday following Central Bank's move to raise interest rates.

Before today's interest rate decision, Mr Erdogan announced he was banning the use of foreign currencies in property sales, rental contracts and leasing transactions and ruled all such transactions must now be made in lira.

There had been indications from the bank that it would raise rates after inflation came in at almost 18 percent in August.

The bank's Monetary Policy Committee raised the one-week repo rate to 24 per cent, meaning it has now increased interest rates by 11.25 percentage points since late April in an attempt to put a floor under the tumbling currency.

"Hemati told the media a meeting with the administrators of the Turkish and Russian Central Banks is expected in the near future and he hopes the agreed topics would rapidly come into effect", the Turkish agency said.

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Following the news, the Turkish lira rose 5 percent in value against the USA dollar, reversing its 42-percent fall this year against the American currency.

"Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement".

The central bank surprised investors by not raising rates when it last met in July. The rate hike could squeeze growth further, but independent experts say it is needed to contain inflation of about 18% and support the currency.

The bank is also fighting a losing battle against inflation with annual consumer price inflation hitting 17.9 percent last month, its highest level since late 2003.

"They act according to the Central Bank's decisions and there are now rates as high as 50 percent in practice", Erdoğan said, underlining that such sharp profits could only be gained through narcotics.

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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.

Key rates are now at their highest level since 2004, around a year after Erdogan first came to power.

The bank later said on Twitter that funding would be provided via the policy rate, the one week repo auction rate, instead of through overnight lending from September 14.

Turkey's currency crisis has been driven by concerns about Erdogan's influence on monetary policy, but also more recently by the country's diplomatic row with the United States.

"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".

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The sense of doom was compounded on August 1, when the USA imposed selective sanctions on Turkey over the detainment of an American pastor.

Turkey's central bank raises interest rate to 24%