Turkey central bank stuns markets with giant rate hike

DXY Index Sideways Grind Continues ahead of BOE ECB Tomorrow

"As of today I have not seen the central bank fix inflation rates as they promised", Erdogan told a conference in Ankara.

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

Turkey has in recent weeks been battling through one of the most troubled periods for its economy under the rule of President Recep Tayyip Erdogan, with the lira battered on currency markets in August.

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

The lira has lost roughly 40 percent of its value against the USA dollar this year, and its inflation rate sits at about 18 percent. It has lost around 40 per cent of its value this year.

The bank vowed the tight stance in monetary policy would be "maintained decisively until inflation outlook displays a significant improvement" in the statement. By way of comparison, the Federal Reserve's much-debated rate hikes earlier this year nudged the rate just fractions of a percentage point to around 2 percent in the U.S.

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. "If you say 'inflation is cause, the rate is the result, ' you do not know this business, friend".

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 rate rise comes on the same day as the Bank of England left the interest rate untouched at 0.75%, citing heightened risks to global growth as a result of volatility within emerging markets, as well as tensions between the USA and China.

Phoenix Kalen, director of EM strategy at Societe Generale, said the market was both pleased and confused by the bank move.

Piotr Matys, emerging markets foreign exchange strategist at Rabobank, said the central bank had taken a decisive step which should allow it to gradually restore confidence in the lira.

The Turkish lira has lost more than 75% of its value against the dollar since January, pushing up the cost of a wide variety of goods.

Piotr Matys at Rabobank said Turkey also needed to resolve its trade dispute with the United States and rebalance the economy away from big infrastructure projects and consumer spending.

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

Thursday's decree, which was published in the government's official gazette, says all current agreements in the property sector made in foreign currencies must be changed within 30 days.

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