Turkey central bank surprises markets with big rate hike

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"The central bank is independent and makes its own decisions", said Recep Tayyip Erdogan, while criticizing the bank for "never succeeding in meeting its inflation targets".

The slump in the lira has been driven by concerns about Erdogan's influence on monetary policy, and more recently a bitter row with the United States that saw the North Atlantic Treaty Organisation allies impose reciprocal trade restrictions and sanctions on each other.

US producer prices unexpectedly fell in August, recording their first drop in 1-1/2 years and denting talk of accelerating inflation following Friday's strong wage data.

The decision by Turkey's central bank on Thursday to sharply raise interest rates was just the latest sign of how unsettled emerging markets have become.

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Nora Neuteboom, an economist at ABN Amro, said the bank's statement indicated a rate rise of around 200 to 250 basis points (2.0 to 2.5 percentage points) was to be expected but no more. The lira touched as high as 6.0030 towards the dollar accurate away following the announcement.

Erdogan earlier this year described interest rates as "the mother and father of all evil", and he has recently been exerting ever greater influence over Turkey's central bank.

Issue of no process on ardour charges in an overheating financial system - Turkey's inflation surged to a 15-year high of 18 percent this month - and obvious obstinacy by Erdogan, who has forced the bank to set charges down in favor of pursuing boost, has mad merchants for months.

The central bank said it was returning to funding via one-week repos from Friday, having funded the market at an overnight lending rate of 19.25 percent for the last month.

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Turkish companies sit on a net foreign-exchange shortfall of $216 billion, and analysts say they are likely to view any bouts of lira strength as an opportunity to rebuild their dollar reserves, slowing any gains.

Washington is pressing Turkey to release a detained American pastor. "If you say 'inflation is cause, the rate is the result", you do not know this business, friend, ' he added. Corporates have greatly borrowed in foreign currencies and with the meltdown of lira year-to-date, there might be an increasing number of corporate defaults and banking sector in problems, added Nordea Bank.

"Accordingly, the Committee has chose to implement a strong monetary tightening to support price stability", the monetary policy committee statement said.

"The next thing to watch will be the reaction of President Erdogan", said Jason Tuvey, senior emerging markets economist at Capital Economics. "For a country that is in really deep distress like Turkey, what is important is to restore some of the independence of the central bank and take measures to stem the currency's fall".

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Turkey's Official Gazette announced Thursday morning that Turkey is banning foreign currency transactions for property sales and rental agreements in the country.

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