Turkey central bank stuns markets with huge rate hike

Turkish President Tayyip Erdogan makes a speech during a meeting in Ankara, Turkey September 13, 2018.

Rental and sale agreements in Turkey are often offered in euros and dollars to foreigners living in the country. "There is tremendous uncertainty right now".

Economists have argued the nominally independent bank has come under pressure from Erdogan who, only a couple of hours before its decision, launched a blistering attack on the bank and described interest rates as a "tool of exploitation".

In a decision published on Thursday in the Official Gazette, the government said any contracts previously made in foreign currency but which are now in effect must be converted into lira within 30 days.

The Turkish central bank on Thursday hiked the one week repo auction rate 625 basis points from 17.75 per cent to 24 per cent, significantly higher than the Bloomberg consensus of 21 per cent.

Turkey's economy has been in trouble since Mr Erdogan swept to a fourth term in office in a victory that handed him greater powers including more influence on the country's monetary policy.

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"The decision did not say what level should be taken for the new contracts, neither identifies what price index will be used for future price hikes, paving the way for potential disputes between the sides (of a contract)" said Cem Baslevent, economics professor at Istanbul Bilgi University.

The lira has lost 40 percent of its value against the United States dollar this year over concerns about Mr Erdogan's influence and a diplomatic spat between Ankara and Washington but firmed to 6.01 following the interest rate decision, from more than 6.4176 beforehand.

President Recep Tayyip Erdogan has appointed himself chairman of Turkey's multi-billion-dollar sovereign wealth fund, according to a decision published Wednesday in the Official Gazette.

Turkey's lira jumped sharply following news of the rate increase.

The depreciation has fueled higher import costs, contributing to an inflation rate that is more than three times the central bank's target, and many investors are calling for a large increase in borrowing costs to put an end to the rout.

Rising U.S. interest rates have discouraged the riskier reach for yield, deepening home-grown crises.

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