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Turkey interest rate hike can't stop lira's fall

May 24, 2018

The Turkish national currency has tanked again just one day after the nation's central bank raised its top interest rate. The move sent the lira soaring only briefly, indicating that market uncertainties prevail.

Currency exchange in Turkey
Image: picture-alliance/dpa/S. Suna

The Turkish lira shed another 2 percent against the dollar and the euro on Thursday morning, shattering hopes that an unexpected interest rate hike by the central bank a day earlier would support the currency longer than just a couple of hours.

The lender had raised its top interest rate to 16.5 percent from 13.5 percent, prompting a short-lived rally in the lira after tumbling by 5 percent before the decision and falling about 20 percent so far this year to a series of record lows.

Investors have been selling off the lira on concerns about monetary policy, particularly after Turkish President Tayyip Erdogan, a self-described enemy of interest rates, said last week he expected to assert greater control over financial policies after elections on June 24. This deepened worries about the ability of the central bank to curb double-digit inflation.

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Erdogan insisted the lira's volatility did not reflect economic reality and warned that he would not let "global governance types ruin the country."

He appealed to Turks not to favor foreign currencies over the lira and said authorities "would definitely take measures to lower inflation and the current account deficit in a very different way after the elections."

The last time the central bank raised interest rates at an emergency meeting was in January 2014 in a bid to stop a similar sell-off.

Erdogan by contrast wants lower borrowing costs to fuel economic expansion as he heads into next month's parliamentary and presidential elections.

hg/mm (AFP, Reuters)