Economy

Turkish central bank raises interest rates by 625bps to 24 percent

Turkish central bank raises interest rates by 625bps to 24 percent

But hours later, the Turkish Central Bank ignored Erdogan, raising interest rates to fight price increases and the risk of runaway inflation.

With this interest rate hike, Turkey has become the third country with the highest political interest rates after Argentina and Suriname.

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

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.

His comments, a day after the central bank hiked interest rates by a mammoth 6.25 percentage points, mark the clearest signal yet that the government may suspend some of the big-ticket bridges, ports and railway projects that have typified Turkey's transformation under Erdogan.

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"The bold decision (by Turkey's central bank) reduces the risk that a full-scale financial crisis may unfold", wrote analysts at Rabobank in a note to clients.

Erdogan said last September the fund was to be reorganised after dismissing its chairman over its failure to meet targets. The rate hike could pinch growth more, but independent experts say it's needed to contain inflation of around 18 percent and support the currency.

The bank said it was hiking its main interest rate by 625 basis points to 24 percent, double the market consensus for the raise.

Istanbul-based economist Ozlem Derici Sengul said investors were anxious about the central bank not being able to take such action due to political pressure, so "the move built credibility". He said the sector had $15 billion in debt and that 70 percent of all shopping mall rent contracts were priced in foreign currency.

Economist Demir says, though, that the situation could have been far worse. This as inflation was up to nearly 18 percent in August, its highest since September 2003 - the year Erdogan first took power as prime minister.

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The European Central Bank and the Bank of England hold policy meetings on Thursday, but both are widely expected to leave interest rates unchanged, though the ECB could confirm when exactly it will end its stimulus programme. 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.

Erdogan has cast the lira crisis as an "economic war" targeting Turkey and has repeatedly urged Turks to sell their dollar savings to shore up the lira.

With the ban in place, all future sales, rental, and leasing contracts must now be made in the country's own currency, the lira.

"The central bank will continue to use all available instruments in pursuit of the price stability objective", the central bank's monetary policy committee said in a statement.

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