Published: Fri, September 14, 2018
Markets | By Otis Pena

Turkish lira hits new high amid rate hike talk

Turkish lira hits new high amid rate hike talk

Ankara/Istanbul: In a remarkable display of choreography, Turkish President Recep Tayyip Erdogan banned the use of dollars in most contracts, railed against high borrowing costs and then stood back as his central bank announced the biggest rate hike of his rule.

The dual developments on Thursday pushed the lira as high as 6.08 against the dollar and it traded flat on Friday morning, standing at 6.03 to the dollar at 07:28 GMT.

The lira has traded in a narrow range since Monday after the central bank last week signaled potential action to stem consumer-price growth that has accelerated to the fastest in 15 years.

The lira, which has lost more than 40% of its value this year, had firmed to as far as 6.08 against the USA dollar following the rate hike on Thursday, but later weakened slightly in early Friday trade.

The lira traded flat on Friday before Erdogan's remarks, holding the gains it made against the U.S. dollar on Thursday after Turkey's central bank increased interest rates and the government banned the use of foreign currencies in the country's property market.

The lira's gains is also proving to be a positive across emerging markets as well with the rand and rouble also gaining on the day, both currencies up by more than 1% against the dollar.

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.

"The central bank is independent and makes its own decisions", he said. The lira's value leaped on news of the decision.

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"Accordingly, the Committee has made a decision to implement a strong monetary tightening to support price stability", it added, explaining the hike.

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

Guillaume Tresca, senior emerging market strategist at Credit Agricole said the economy needed to slow down because it was overheating and that an interest rate rise was needed to cap lira depreciation. "If you say ´inflation is the cause, the rate is the result´, you do not know this business, friend", he added.

"Interest rates are the cause, inflation is the result".

"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.

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.

A growing crisis became acute earlier this year following the detention of an American pastor on espionage and terror-related charges, which prompted Donal Trump to double the import tariffs on Turkish steel and aluminium.

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