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

Turkish lira gains value against US dollar

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The lira has risen against the dollar after Turkey's central bank hiked interest rates to 24% on Thursday - the biggest increase in President Tayyip Erdogan's 15-year rule.

"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. It later shed some of those gains but was still up 3.0 per cent in value at 6.14 to the dollar.

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

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"Deterioration in the pricing behavior continues to pose upside risks on the inflation outlook, despite weaker domestic demand conditions", the statement said, adding that "a strong monetary tightening" would be implemented to support price stability. Facing a deep slide in the lira and a steep run higher in inflation, the central bank felt compelled to lift rates to restore investor confidence-a risky gambit that boosted the lira but could further damage the economy.

"Accordingly, the Committee has made a decision to implement a strong monetary tightening to support price stability", the monetary policy committee statement said.

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.

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Its decision came despite Erdogan repeating his opposition to high interest rates earlier in the day, saying high inflation was a result of the central bank's wrong steps.

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 worldwide investors.

The central bank's move makes Turkey's interest rate one of the highest in the world. "If you say 'inflation is cause, the rate is the result, ' you do not know this business, friend".

The central bank said it was returning to funding via one-week repos from Friday, having funded the market at an overnight lending rate of 19.25 per cent for the last month.

As well as being seen to undermine the independence of the central bank, Erdogan in July stunned markets by appointing his son-in-law Berat Albayrak as finance minister.

The US earlier hit Turkey with tariffs on items such as steel and aluminium in an effort to increase pressure on the country to free the detained American pastor Andrew Brunson.

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