Despite Erdogan rhetoric, Turkey raises rates for first time since 2014

By Daren Butler and Behiye Selin Taner

ISTANBUL (Reuters) - Turkey raised interest rates for the first time in nearly three years on Thursday, hiking its benchmark rate by a more-than-expected 50 basis points as concerns about a tumbling lira eclipsed President Tayyip Erdogan's calls for cheap credit.

The lira has lost some 14 percent of its value this year and hit a series of record lows, battered by a resurgent dollar following the Donald Trump victory in the U.S. election and by domestic security worries after a failed July coup.

Erdogan, who has described himself as an "enemy" of interest rates and chastised banks for what he says is the high cost of credit, wants the central bank to lower rates to spur growth. Investors have long argued the Turkish central bank needs to tighten, citing the inflation risk posed by the weaker currency.

"Today's rate hikes show the extent to which domestic and external conditions have deteriorated, forcing the central bank's hand," Nicholas Spiro, a partner at consultancy Lauressa Advisory in London.

"While the surge in the dollar since the U.S. election has put further strain on the lira, it's the escalation in the post-coup crackdown on dissent over the past few months which has unnerved investors the most."

Investors have been particularly worried about rule of law in Turkey. More than 125,000 people in the military, judiciary and elsewhere have been sacked or suspended while about 36,000 have been jailed pending trial.

The bank raised the benchmark one-week repo rate to 8 percent from 7.5 percent, bigger than the 25 basis point hike forecast by 12 out of 19 economists polled by Reuters.

In another unexpected move, it increased the overnight lending rate - the highest of the multiple rates it uses to set policy - to 8.5 percent from 8.25 percent.

But the increases failed to give the lira a sustained boost. After firming immediately after the decision, it later touched a record low of 3.4430 to the dollar.

14-YEAR EFFORT

"Exchange rate movements due to recently heightened global uncertainty and volatility pose upside risks on the inflation outlook," the central bank's monetary policy committee said in its statement.

"The committee decided to implement monetary tightening to contain adverse impact of these developments on expectations and the pricing behavior."

On the eve of Thursday's meeting, Erdogan said he had a right to criticize the central bank despite its independence.

"Since I took on the job of leading Turkey 14 years ago, I have only fallen short of making headway in a few areas that I desired. One of those is the cutting of interest rates," he said in a speech at the stock exchange.

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"I have nothing against the independence of the central bank, but I cannot allow my people's will and rights to be taken away with high interest rates," he said.

Analysts said the central bank's moves could go some way to reassure investors.

"Rather than the magnitude of the hike, the important thing was to see that the (central bank) was willing and able to hike rates," Yarkin Cebeci, an analyst at JP Morgan said in a note to clients.

"Today's decision also shows that the bank can do more of the same if needed in the coming months."

Whether that happens may well depend on Erdogan. In his speech on Wednesday night, he reached back to Turkey's Ottoman past for evidence of the perfidy of bankers.