Turkey's central bank on Thursday surprised markets with a bigger than expected rate hike to battle soaring inflation and boost the lira, prompting the embattled currency to surge in value.
The bank said it was hiking its main interest rate by 625 basis points to 24 percent, double the market consensus for the raise.
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’.
The monetary policy committee of the bank said the one-week repo rate was being lifted to 24 percent from 17.75 percent, the first rate hike since June.
The lira reacted strongly to the decision, rising by five percent in value to 6.0 lira to the US dollar. It later shed some of those gains but was still up 3.0 percent in value at 6.14 to the dollar.
The lira has plunged in recent weeks on concerns over domestic policymaking and a crisis in relations with the United States
The bank said that inflation developments pointed ‘to significant risks to price stability’ due to the recent fall in value of the lira.
‘Deterioration in the pricing behaviour continues to pose upside risks on the inflation outlook, despite weaker domestic demand conditions.
‘Accordingly, the Committee has decided to implement a strong monetary tightening to support price stability,’ it added, explaining the hike.
Apparently not ruling out further rate hikes, it vowed to ‘use all available instruments in pursuit of the price stability objective’.
A ‘tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement,’ it added.
But Erdogan -- who has been accused by critics of pressuring the nominally independent central bank -- had earlier charged the bank with failing to control inflation and again aired his unorthodox view that low rates bring inflation down.
‘As of today I have not seen the central bank fix inflation rates as they promised,’ Erdogan told a conference in Ankara.
‘Interest rates are the cause, inflation is the result. If you say 'inflation is cause, the rate is the result', you do not know this business, friend,’ he added.
Erdogan again described interest rates as a ‘tool of exploitation’ but vowed that ‘we cannot be taken advantage of’.
It was not immediately clear if Erdogan had been aware of the central bank's decision when he made his comments.
‘The central bank is independent and makes its own decisions,’ he said.
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