Turkish leader Erdogan criticizes central bank's rate hike

The president will oversee financing for large state development projects

Policy makers increased the one-week repo rate by 625 basis points on Thursday to 24%, more than econ%mists expected.

"If wished, extra monetary tightening will be delivered", the bank stated in an announcement.

The Turkish currency has plunged some 40 percent against the dollar this year while annual inflation has jumped to almost 18 percent and economic growth has slowed to an annual rate of 5.2 percent.

That dwarfs what the market was expecting in the region of around 300 to 500 bps.

The bank had faced a dilemma, and still does. Last year, against conventional wisdom, he argued that high interest rates actually cause inflation. In the other direction, with the economy heading into recession, lower rates would help inject growth stimuli.

An index of world stock markets climbed to its highest in over a week on Friday as expectations grew that the United States and China would start fresh trade talks, while an interest rate hike in Turkey supported the lira and emerging markets. Economic orthodoxy suggests the opposite.

Erdoğan has always been pressuring TCMB to keep interest rates low to allegedly boost economic growth. He's always maintained interest rates should be cut and has derided high-interest rates as an "instrument for exploitation".

The fund was established in August 2016 and tens of billions of dollars worth of state assets including - wholly state-owned - Ziraat Bank were transferred to it in 2017.

"Interest rates are the cause, inflation is the result".

But Neuteboom of ABN Amro said much more was needed for Turkey to turn around "the negative spiral" the economy is in.

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Despite the comments, Erdogan added: "There has been no change in my sensitivities on the issue of interest rates".

As well as being seen to undermine the independence of the central bank, Erdogan in July stunned markets by appointing his son-in-law Berat Albayrak as finance minister.

He described the sudden fall in the value of the lira last month, when the currency reached more than seven against the dollar, as an "economic assassination attempt".

And they say Erdogan remains unpredictable in his policies since he was re-elected this year as president with vastly expanded powers.

In August, annual consumer price inflation hit 17.9 percent, its highest level since late 2003, prompting the central bank to say it would adjust its monetary stance at the September meeting in the face of "significant risks" to price stability.

Turkey is involved in a diplomatic standoff with the USA over the detention of an American evangelical pastor.

"Accordingly, the Committee has made a decision to implement a strong monetary tightening to support price stability", it said.

The initial reaction from market has been positive for the Turkish lira with USD/TRY down to 6.20 from 6.45, which is around 4 percent stronger.

The lira crisis has also spread to some other emerging market countries with weak economic fundamentals such as sizable current account deficits.

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