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Turkey: An Interest Rate Hike Stops the Bleeding
14 September 2018, 07:14 | Joann Bryant
Erdogan appoints himself chairman of Turkey’s sovereign wealth fund
The currency rose to touch 6.3673 per dollar, the highest since August 29.
He criticised the centralbank, saying it had consistently miscalculated inflation targets and again portrayed the currency crisis as a foreign conspiracy.
The lira has lost 40 percent of its value against the United States dollar this year over concerns about Mr Erdogan's influence and a diplomatic spat between Ankara and Washington but firmed to 6.01 following the interest rate decision, from more than 6.4176 beforehand.
The bank´s intervention was the latest aggressive rate hike to calm economic turbulence in an emerging market after the Argentinian central bank´s recent hike from 45 to 60 percent on August 30. After Thursday's rate rise it was down nearly 39 percent against the dollar this year.
Turkish companies sit on a net foreign-exchange shortfall of $216 billion, and analysts say they are likely to view any bouts of lira strength as an opportunity to rebuild their dollar reserves, slowing any gains.
Earlier in the day, Erdogan sowed confusion throughout the business community by publishing a decree making the lira the only currency that can be used in contracts between Turkish entities.
The surprise move buoyed markets that had been mired in a slump for months, triggered by a diplomatic row with the USA and then amplified by central bank inaction.
All 11 economists in a Reuters poll forecast the bank would tighten, but with the rate hike predictions ranging between 225-725 basis points as the bank balances concerns over lira weakness with worries about an economic slowdown.
There had been indications from the bank that it would raise rates after inflation came in at almost 18 per cent in August, according to official data last week.
"Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement". For now though, this should provide the lira a much needed relief in the short-term.
The embattled currency has fallen by 40% this year amid a lack of interest rate hikes to control inflation.
Key rates are now at their highest level since 2004, around a year after Erdogan first came to power. 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.
He's delivered on that pledge, ousting the old guard of policy makers who'd guided the economy since 2002 and giving himself the sole authority to make appointments at the central bank and other state organizations.
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.
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