Turkey Central Bank Raises Benchmark Rate to 24%; Lira Rallies

(Bloomberg) — Countering President Recep Tayyip Erdogan, Turkey’s central bank raised its benchmark interest rate more than anticipated to stabilize the country’s finances. The currency rallied.

The Monetary Policy Committee led by Governor Murat Cetinkaya on Thursday increased the one-week repo rate by 625 basis points to 24 percent, more than the median estimate in a Bloomberg survey that called for a hike of 325 basis points.

The bank’s decision was announced hours after Erdogan triggered tumult by repeating his hostility to higher borrowing costs and issuing an order that limited the use of foreign currency in domestic transactions. The independence of monetary policy has been in doubt since Erdogan pledged in his election campaign this year to take on a greater role to bring interest rates lower.

While the lira’s plight has made it “rational to expect at least 1000 basis points” added to interest rates, opposition to higher borrowing costs among Turkish officials made a smaller increase more realistic, Rabobank currency strategist Piotr Matys said before the decision. “A rate hike would be an important step to restore market confidence in the lira. This is critical in order to reduce the risk of a full-scale financial crisis that could be followed by a prolonged recession,” said Matys, who expected an increase of 500 basis points.

Lira Gains

The lira rose after the decision and was trading 5.3 percent higher at 6.0254 per dollar at 2:04 p.m. in Istanbul. It has lost around 40 percent of its value this year.

For more on Erdogan’s pledge, read: Erdogan Intends to Tighten Grip on Turkish Economy, Rate Policy

Turkey’s financial troubles have helped fuel an investor exodus from emerging markets in other regions — with the Argentine peso and the South African rand sliding. Rising U.S. interest rates have discouraged the riskier reach for yield, deepening home-grown crises.

Before the move by policy makers in Ankara Thursday, the run on the currency forced the central bank to deliver some tightening where it could. They increased the cost of cash to commercial lenders by around 150 basis points last month by forcing them to use a borrowing tool costlier than the one-week repo rate.

Earlier in the day, Erdogan published an executive decree that forces contracts between two entities in Turkey to be made in liras rather than foreign currencies.

The measure applies to contracts on the buying and selling of any kind of property, real estate, transportation, financial leasing, leasing, services and products, according to the decree published in the Official Gazette.

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. He said the sector had $15 billion in debt and that 70 percent of all shopping mall rent contracts were priced in foreign currency.

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