Turkey raises interest rates to 24% in new bid to boost lira

Erdogan appoints himself chairman of Turkey's sovereign wealth fund

The Turkish Central Bank announced the increase despite fears President Recep Tayyip Erdogan - an avowed "enemy of interest rates" - was putting pressure on the bank to keep rates on hold.

The dual developments on Thursday pushed the lira as high as 6.08 against the dollar and it traded flat on Friday morning, standing at 6.03 to the dollar at 07:28 GMT.

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

The lira, which has lost more than 40% of its value this year, had firmed to as far as 6.08 against the U.S. dollar following the rate hike on Thursday, but later weakened slightly in early Friday trade.

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.

Turkish lira implied volatility gauges fell to their lowest levels in more than a month, as sentiment continued to improve.

The Turkish lira gained ground against the USA dollar on September 12 ahead of the monetary policy committee meeting of the Turkish Central Bank.

The lira firmed to 6.01 against the dollar following the decision, from more than 6.4176 beforehand.

"It was a big surprise to us, but probably to every Turkey-watcher", said Nora Neuteboom, an economist at ABN Amro, saying the move was a "positive signal" with the bank wanting to show its independence and commitment to fight inflation.

The lira is down 38% against the dollar this year despite Thursday's slim gain.

Earlier in the day, Erdogan sowed confusion throughout the business community by publishing a decree making the lira the only currency that can be used in contracts between Turkish entities. The rate hike could squeeze growth further, but independent experts say it is needed to contain inflation of about 18% and support the currency.

As part of Turkey's medium-term economic program, which Finance Minister (and Erdogan son-in-law) Berat Albayrak is scheduled to release this month, officials are expected to give a clearer indication as to how the country intends to escape from its plight of high private debt, slipping currency, high inflation and large current account deficit.

Key rates are now at their highest level since 2004, around a year after Erdogan first came to power.

"Great decision - made all the more hard by the huge pressure on the central bank from Erdogan", said Bluebay Asset Management LLC strategist Tim Ash.

Relations with the United States deteriorated last month after Washington imposed sanctions on two Turkish ministers over the detention of an American pastor and President Donald Trump doubled steel and aluminium tariffs on Turkey.

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