Turkish central bank sharply increases rates and stimulates read

ISTANBUL (Reuters) – The Turkish central bank lifted its key interest rate by 625 basis points on Thursday, the biggest rise in 15 years by President Tayyip Erdogan, which has revived the lira and perhaps alleviated investors' fears.

The Bank's Monetary Policy Committee increased the TRINT = ECI exchange rate to 24%, which means that it has raised interest rates by 11.25 percentage points since the end of April.

His decision was made despite Erdogan reiterating his opposition to high interest rates earlier in the day, saying high inflation was the result of bad central bank action.

The 11 economists in a Reuters survey had all forecast that the bank would tighten, forecasting between 225 and 725 basis points, offsetting fears of a weak lira and fears of a sharp economic slowdown .

The turmoil in Turkey was provoked by concern over Erdogan's influence on monetary policy, but also, more recently, by the country's diplomatic relations with the United States.

Erdogan, who describes himself as an "interest rate foe," has chosen his son-in-law, Berat Albayrak, as finance minister in July. This has heightened investor fears that the president – who wants borrowing costs to fall to boost credit growth and construction – is looking for greater influence on monetary policy.

"It's nice to see common sense prevail," said Brett Diment, head of emerging debt at Aberdeen Standard Investments, about rising rates.

"Hiking today is driving Turkey on the slow path of restoring the credibility of monetary policy, and it is essential."

In August, annual consumer price inflation reached 17.9%, its highest level since the end of 2003, prompting the central bank to adjust its monetary policy at the September meeting against "significant risks". price stability.

The central bank said Turkey's inflation outlook was still on the rise due to the deterioration in price behavior, despite weak domestic demand.

"As a result, the Committee decided to put in place a strong monetary tightening to support price stability," the report added.

MARKETS RALLY

The TRYTOM = D3 reading rose 3% to 6.18 against the dollar, previously trading at 6.4176. It still lost 38% of its value against the US currency this year.

The main .XU100 stock index rose 2.1%, with the .XBANK banking index up 4.8%. Dollar-denominated bonds issued by the Turkish government have moved up the curve.

The central bank announced its return to funding via one-week repos starting Friday, after funding the market at a 19.25 percent overnight loan rate last month.

The key rates are now at their highest level since 2004, about a year after Erdogan came to power.

Guillaume Tresca, emerging markets strategist at Crédit Agricole, said the economy was slowing as it overheated and interest rates were needed to limit the depreciation of the pound.

"Obviously, this will have negative consequences for the economy, but I would say it's less important if you have a hard landing than the big business failures because of the vicious circle between depreciation and inflation," he said. he declared.

The pound weakened earlier on Thursday before the central bank's decision, as Erdogan's harsh criticism of the central bank and the high level of interest sparked doubts among investors about the tightening of the bank's policy.

Phoenix Kalen, chief strategy officer at Société Générale, said the market was both satisfied and confused by the bank's decision.

"It almost looks like it's a game of" good cop, bad cop "that's played out between Turkish authorities – President Erdogan, on the other hand, continues to make statements about his aversion to rates of interest and … central bank in response to recent inflationary and geopolitical developments ".

Piotr Matys, emerging market strategist at Rabobank, said the central bank had taken a decisive step towards gradually restoring confidence in the lira.

He said Turkey also had to resolve a dispute with the United States, bringing the pound to 7.24 against the dollar a month ago and rebalancing the economy of major infrastructure projects and spending. consumption.

Against all odds, the central bank did not raise rates at its last meeting in July. Subsequently, the lira lost about 25% of its value, while the authorities took a series of measures to support it, with the bank taking liquidity measures and banking supervision limiting derivative transactions.

Erdogan described the crisis as an "economic war" against Turkey, repeatedly urging Turks to sell their savings in dollars to support the read.

On Thursday, he decided that contracts for the sale and rental of properties had to be concluded in lire, putting an end to these foreign exchange transactions.