June 7, 2018 / 11:13 AM / 14 days ago

Turkey's central bank raises benchmark rate by 125 basis points after inflation spike

ISTANBUL, June 7 (Reuters) - Turkey’s central bank raised its benchmark rate by 125 basis points to 17.75 percent on Thursday, following up on last month’s dramatic increase with more tightening after inflation spiked.

The lira firmed to 4.4516 against the dollar following the decision, from 4.5799 directly before.

Concerns about President Tayyip Erdogan’s growing influence on monetary policy and doubts over the bank’s ability to rein in double-digit inflation have sent the currency down some 16 percent this year.

To stem the sell-off, the bank hiked rates by 3 percentage points at an emergency meeting last month and said it would return to a single policy rate. Investors have been expecting further tightening, particularly after data on Monday showed annual inflation quickened to 12.15 percent in May.

Eleven out of 16 economists polled by Reuters had predicted the bank would hike its one-week repo rate, with five each forecasting increases of 50 and 100 basis points.

One economist predicted an increase of 75 basis points while five forecast no change.

The bank’s move to a single rate - it had for years used a complex system of multiple rates to set policy - was something long sought by investors. Its other rates, including the late liquidity window, are now directly derived from the benchmark rate, meaning policy should be more predictable.

The lira sell-off has reflected what investors say is widening concern about monetary policy under Erdogan.

The president, a self-described “enemy of interest rates”, has stepped up pressure on the bank to cut borrowing costs in order to spur credit growth and construction ahead of national elections on June 24. (Reporting by Ezgi Erkoyun; Editing by David Dolan and John Stonestreet)

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