Turkey boosts lira as central bank surprises markets with big rate hike

"Erdogan's comments clearly show that he does not support this and it becomes much more hard, if not impossible, for the Turkish central bank to tighten enough to stabilize the lira and get inflation under control", Esther Reichelt, a forex strategist at Commerzbank in Frankfurt, told DW.

Against expectations, the central bank did not raise rates at its last meeting in July.

"Accordingly, the Committee has chose to implement a strong monetary tightening to support price stability", the monetary policy committee statement said.

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

The bank had not touched interest rates since early June with markets becoming increasingly concerned that the policy of the nominally independent bank is being dictated by Erdogan.

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

Neil Wilson, chief market analyst at Markets.com said: "This was a definite statement from policymakers, but the risk now is that the market tries to test the central bank's resolve: the horse may have already bolted".

The central bank's move makes Turkey's interest rate one of the highest in the world.

Piotr Matys, emerging markets foreign exchange strategist at Rabobank, said the central bank had taken a decisive step which should allow it to gradually restore confidence in the lira.

He has repeatedly blamed the central bank for high inflation, which hit nearly 18% last month, its highest level since 2003.

The embattled currency has fallen by 40% this year amid a lack of interest rate hikes to control inflation. "Erdogan´s speech. was meant to put distance between himself and the (bank´s) decision". "If you say 'inflation is cause, the rate is the result, ' you do not know this business, friend".

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.

The bank's decision was announced hours after Erdogan triggered tumult by repeating his hostility to higher borrowing costs and issuing an order that limited the use of foreign currency in domestic transactions.

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.

Relations with the U.S. deteriorated last month after Washington imposed sanctions on two Turkish ministers over the detention of an American pastor and President Donald Trump doubled steel and aluminium tariffs on Turkey.

Vanessa Coleman

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