Erdogan says rate hike was bitter but necessary for Turkey

Erdogan says rate hike was bitter but necessary for Turkey”

The reshuffle and Erdogan's subsequent promise to give his new economic team a free rein to right the economy sparked a sharp rally on the Turkish market.

Turkey's central bank sharply raised its benchmark interest rate, pledging to combat inflation less than two weeks after President Recep Tayyip Erdogan reshuffled his economic team and backed a shift in approach to fix an economy beset by a dwindling currency.

The CBRT raised rates in September, but last month it held its key policy rate steady despite expectations for another policy tightening.

The lira has lost nearly a quarter of its value this year and has slid by more than half since the start of 2018 when a currency crisis swept through financial markets.

The ongoing currency collapse had heightened concerns about a payment crisis in the country because Turkish companies and the state are heavily indebted in foreign currencies.

Loss of income due to the slump in the important tourism business is now worsening the situation, which is also characterized by the fact that the central bank had used up its foreign exchange reserves in the vain defense of the Lira exchange rate.

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"In the periods ahead, all factors affecting inflation will be taken into account, and the tightness of monetary policy will be decisively sustained until a permanent fall in inflation is achieved", the statement added.

The bank said the one-week repo auction rate would go to 15 percent from 10.25 percent and that it was eliminating all other lending facilities to make its policy decisions more "transparent".

"The lagged effects of depreciation in Turkish lira, increasing worldwide food prices and deterioration in inflation expectations affect the inflation outlook adversely", the central bank noted. It increased its late liquidity window rate to 14.75 percent to counter persistent double-digit inflation, which stood at 11.89 percent in October. Governor Agbal was installed by President Erdogan less than two weeks ago, but has already moved quickly to implement the new economic approach.

The policy meeting was being closely watched after President Recep Tayyip Erdogan last week promised reforms and a new era in the management of the economy to attract foreign investments. Agbal's appointment was followed by the resignation of Erdogan's son-in-law and finance minister Berat Albayrak, who was later replaced by Lutfi Elvan, a former deputy prime minister. He also wants to focus on growth, exports and employment.

"We should not let our investors be oppressed by high interest rates", he said on Wednesday.

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