Turkey central bank hikes rates to 24%

DXY Index Sideways Grind Continues ahead of BOE ECB Tomorrow

However, the property and construction market has become a concern for investors anxious that Turkish companies that borrowed heavily to profit from a boom may struggle to repay loans in foreign currencies, as the weakened lira means there is now more to pay back.

All 11 economists in a Reuters poll had forecast the bank would tighten, with the predictions ranging between 225-725 basis points as it balances concerns over the lira's weakness with worries about a sharp economic slowdown.

It said: "Accordingly, the committee has made a decision to implement a strong monetary tightening to support price stability".

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.

"Deterioration in the pricing behaviour continues to pose upside risks on the inflation outlook, despite weaker domestic demand conditions", the bank added.

The move comes as Turkey's currency has lost nearly a third of its value against the dollar since January.

The Central Bank of the Republic of Turkey (CBRT) raised the rate from 17.75% to 24%, significantly higher than the analysts' consensus of 21%, and in apparent defiance of the president, who has regularly expressed resistance to raising rates.

The main share index rose 2.1 percent, with the banking index up 4.8 percent.

Key rates are now at their highest level since 2004, around a year after Erdogan first came to power. Erdoğan has always been pressuring the bank to keep interest rates low to encourage economic growth.

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The bank had not touched interest rates since early June with markets concerned that the policy of the nominally independent bank is being dictated by Erdogan.

"Obviously, it will have negative consequences on the economy but, I would say, it is less important if you have a hard landing than big corporate defaults due to a vicious cycle between (lira) depreciation and inflation", he said.

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

There had been indications from Turkey's central bank that it would raise rates, after inflation came in at almost 18% in August, according to official data.

Neil Wilson, chief market analyst at Markets.com said: "This was a definite statement from policymakers, but the risk now is that the market tries to test the central bank's resolve: the horse may have already bolted".

That decision sent the lira tumbling by a quarter and prompted Turkish authorities to impose a series of measures meant to support the currency.

Mr Erdogan has previously urged Turks to sell their dollars and euros.

In a bid to shore up the Turkish lira, Erdoğan's government issued a decree on Thursday banning the use of foreign currency in the sale and renting of property and the leasing of vehicles.

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