Turkish lira gains value against United States dollar

Gladys Abbott
September 16, 2018

Speculation has been growing that the monetary authority will deliver a sizeable interest-rate increase Thursday after it signalled potential action last week to help stem accelerating inflation.

Istanbul-based economist Ozlem Derici Sengul said investors were anxious about the central bank not being able to take such action due to political pressure, so "the move built credibility".

With this interest rate hike, Turkey has become the third country with the highest political interest rates after Argentina and Suriname.

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 U.S. and China.

The bank later said funding would be provided via the policy rate, the one week repo auction rate, instead of through overnight lending from September 14.

Taking that into account, the latest hike will result in an additional tightening of 475 basis points, somewhat less than the headline number suggests.

Economists and business analysts said the ruling was unlikely to have any permanent positive impact on the Turkish economy.

"This became once the coolest decision", commented Timothy Ash, senior rising markets strategist at Bluebay Asset Administration.

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The move comes after the lira's drastic fall in value against the USA dollar last month during one of the worst diplomatic rows between North Atlantic Treaty Organisation allies Washington and Ankara. Many of his government's own contracts, including for building motorways and operating airports, are now priced in dollars or euros. The decree also forbade signatories from indexing their transactions to foreign currencies, while ordering existing contracts in other currencies to be switched to the lira by October 12. The government has yet to clarify the new rules.

The measure will create "total chaos" and is probably impossible to implement within the time frame allotted, according to Hulusi Belgu, head of the Turkish shopping malls investors association.

The president said: "We are solving the issue of rent in foreign currency, which concerns a lot of our vendors, once and for all".

It's common in Turkey, a country that's long struggled to contain inflation, to index prices in dollars or euros for everything from cars to legal services. Ethical sooner than the choice, he had accused the Turkish president of "bringing on chaos in Turkey's financial system".

Erdoğan has always been pressuring TCMB to keep interest rates low to allegedly boost economic growth.

Erdoğan also said that Turkey is putting new government investments on hold, ministries were reviewing their plans and would not consider making fresh investments.

European Central Bank President Mario Draghi said the strength of the European economy continues to support confidence but added that inflation is likely to hover at current levels.

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