Turkey's lira rallies after emergency rate hike

Turkey's lira rallies after emergency rate hike

The lira weakened as much as 3.2 per cent against the U.S. dollar, its biggest drop since October, hitting a record low at 4.8203. Inflation is now at 10.85 percent.

It said Erdogan's "explicit threat to curb the central bank's independence increases risks to the policymaking environment and to policy effectiveness".

The 300 basis points hike was largely in line with what economists said was needed and, in a hawkish statement, the central bank said it would continue to use "all instruments" to achieve price stability.

The next meeting of Turkey´s central bank is not due until June 7 but economists believe an emergency - and substantial - rate hike by the central bank is not only on the cards, but essential.

"A tight stance in monetary policy will be maintained decisively until the inflation outlook displays a significant improvement", it added.

Erdogan said Turkey had the means to stem the currency fluctuation, and he vowed to adopt new measures after the June 24 polls to stem inflation and the nation's current account deficit.

While some may be distracted by Italian politics in the FOMC minutes, very bad EZ PMI's and disappointing UK CPI where both the euro and cable have met YTD lows, the EM's have been struggling in the resurgence of the greenback and not least the Turkish Lira.

The currency has slumped about 12% this month alone, with only the Argentine peso having plunged more.

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With the bank and its chairman Murat Cetinkaya silent for the past week, he said the central bank needs also to act to "shore up its own credibility" with markets questioning whether it will "be able to take action".

He has also made statements that fly in the face of economic orthodoxy, describing interest rates as the "mother and father of all evil" and saying low interest rates help keep down inflation.

Erdogan has called for low interest rates to ensure strong growth.

A similar measure was taken Wednesday morning by the Istanbul Stock Exchange which chose to convert all foreign exchange asset needs to lira "in order to fight speculative actions aimed at creating negative image of Turkey before the elections".

Since September, when the combination of problematic politics and fast rising inflation began to unnerve investors, The currency has dropped nearly 30 percent.

Things began to fall apart when President Erdogan who was in London for a three-day visit to calm concerns of worldwide investors told Bloomberg last week that he would seek a greater say in shaping monetary policy.

Although he does not control interest rates, he wields enormous power in the country and likely try to pressure the central bank. "But the relief has often proved short-lived", he said.

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