Published: Fri, September 14, 2018
Finance | By Loren Pratt

Turkey central bank raises benchmark rate to 24%; lira rallies

Turkey central bank raises benchmark rate to 24%; lira rallies

The lira had weakened earlier on Thursday before the central bank decision as Erdogan's fierce criticism of the central bank and high interest raised doubts in investors' minds about how much the bank might tighten policy.

The Central Bank of the Republic of Turkey (CBRT) raised the rate from 17.75% to 24%, significantly higher than the analysts' consensus of 21%, and in apparent defiance of the president, who has regularly expressed resistance to raising rates.

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

The magnitude of the hike was all the more surprising given that just before the decision Erdogan had slammed interest rates as a "tool of exploitation".

Erdogan, a self-described "enemy of interest rates", assumed new powers under an executive presidential system following an election in June and has appointed his son-in-law as finance minister.

"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. 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.

The bank said on Thursday that inflation developments pointed "to significant risks to price stability" due to the recent fall in value of the lira. "The lira crisis seems to be far from over".

The lira reacted strongly to the decision, rising by 5 per cent in value to 6.0 lira to the United States dollar.


Turkey's currency and inflationary troubles are also compounded by the threat of steel and aluminium tariffs from the U.S. as well as sanctions over the detention of an American evangelical pastor. Growth slowed to an annual rate of 5.2% in the second quarter, from the first quarter's 7.4%.

Mr Erdogan has previously urged Turks to sell their dollars and euros.

"For any property transaction it's the price at the moment of the deal that counts. It's only really going to be a bit problematic if you're repatriating to the country you came from".

The fund was established in August 2016, in the aftermath of the attempted overthrow of Erdogan the previous month, to develop and increase the value of Turkey's strategic assets and provide resources for investment.

Albayrak and Sonmez were among the seven members in the Turkish fund's new board, the Reuters news agency reported.

Last September, Erdogan said the fund had failed to realize a "targeted and desired" outcome.

Tens of billions of dollars worth of state assets, including the wholly state-owned Ziraat Bank, were transferred to it in 2017.

Such funds can be used for large projects, maintaining pensions and national welfare programmes, or in times of crisis.

Like this: