Published: Fri, September 14, 2018
Economy | By

Turkish interest rate rise brings Erdoganomics down to earth

Turkish interest rate rise brings Erdoganomics down to earth

Brett Diment at Aberdeen Standard Investments said raising rates would put "Turkey on the slow road to recovering some monetary policy credibility, and that is critical".

President Recep Tayyip Erdogan has appointed himself chairman of Turkey's multi-billion-dollar sovereign wealth fund, according to a decision published Wednesday in the Official Gazette.

"It nearly seems like it's a game of "good cop, bad cop" being played out between the Turkish authorities - with President Erdogan on the one hand still making statements regarding his dislike of interest rates and. a very sizeable reaction from the central bank in response to the recent inflationary and geopolitical developments", she said. The bank said further tightening will be delivered if needed.

The central bank said deterioration in pricing behaviour continued to pose upside risks on the inflation outlook, despite weaker domestic demand conditions.

It described the hike as a "strong monetary tightening to support price stability".

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".

It stood at 6.13 to the dollar at 0447 GMT.


It has now increased interest rates by 11.25 percentage points since late April as it struggles to bring the lira out of freefall.

The bank must balance concerns over slipping growth, which, although a robust 5.2 per cent in the second quarter on an annual comparison, showed signs of weakness with some analysts predicting Turkey is heading for recession.

The move came despite Mr Erdogan repeating his opposition to high interest rates earlier in the day.

Ignoring calls for restraint from President Recep Tayyip Erdoğan, the bank raised its main short-term rate from 17.5% following weeks of pressure from global investors.

The embattled currency has fallen by 40% this year amid a lack of interest rate hikes to control inflation. "If you say "inflation is the cause, the rate is the result", you do not know this business, friend", he added. They increased the cost of cash to commercial lenders by around 150 basis points last month by forcing them to use a borrowing tool costlier than the one-week repo rate.

The US hit two Turkish ministers with sanctions over the detention of US pastor Andrew Brunson and President Donald Trump doubled steel and aluminium tariffs on Turkey.

"Great decision - made all the more hard by the huge pressure on the central bank from Erdogan", said Bluebay Asset Management LLC strategist Tim Ash.

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