The Turkish central bank’s September 13 hiking of its benchmark interest rate by 625 basis points has ended the debate over whether the regulator is free to pursue an independent monetary policy, Turkey’s Finance Minister Berat Albayrak has told pro-government newspaper Sabah.

Albayrak, who also announced that Turkey would put forward its medium-term economic programme on September 20, and President Recep Tayyip Erdogan—who is Albayrak’s father in-law—have been fighting the perception that, as part of the beefed-up executive presidency launched in July, Erdogan is having the ultimate say over rate-setting. Jitters over how this might be the reality feature heavily in Turkey’s ongoing currency crisis, particularly as the populist Erdogan espouses the unorthodox economic theory that, even amid rocketing inflation, Turkey should seek to cut interest rates. There is now some hope, however, that Albayrak, appointed finance minister two months ago, is proving a conventional influence on the president.

Prior to the unveiling of the rate increase to 24%, Erdogan used a speech to a traders’ confederation in Ankara to defend his rate-setting theories and blast the central bank for “wrong steps” in the fight against inflation, now at a 15-year high of 17.9% in Turkey and rising. However, most analysts have concluded that behind the scenes Erdogan accepted the need for tightening given Turkey’s increasingly dire financial straits, but decided to put on some political theatre to prepare his base constituency for the move.

TRY gives up some gains
The TRY, which prior to the hike had been trading at around 40% down against the dollar in the year to date, on September 13 strengthened by around 4%. However, by around 17:30 local time on September 14 it had given up some of those gains, having weakened by around 1% to 6.1492. Bloomberg reported Istanbul-based currency traders as saying that following the interest rate decision Turkish companies and households bought up to $2bn worth of foreign currency, showing confidence in the recovery of the lira is nowhere near what the government might hope for.

Still unsettling to investors is that Erdogan still refuses to accept that the currency crisis—which analysts say risks pushing the Turkish economy into a debt and liquidity crisis—is largely down to Turkey’s economic fundamentals, such as debt-fuelled growth hugely reliant on hard currency borrowing against the backdrop of a gaping current account deficit.

On September 14, Erdogan returned to his theme that Turkey and its currency are under a financial markets assault waged by foreign actors. In a speech to officials of his Justice and Development Party (AKP) in Ankara, he said: “We have faced a heinous attack targeting the Turkish economy after a series of negative statements from the US about our country were used as an excuse.”

He added that Turkey would now see the result of the central bank’s independence.

In his comments to Sabah on the upcoming three-year medium-term economic programme, Albayrak said it would outline “realistic macro targets” with the “right action plans” toward the economy’s problems, Reuters reported.

Many analysts see Turkey as heading into a painful recession.

In a further move to support the TRY, Erdogan has banned the use of foreign currencies in domestic contracts, with a particular emphasis on taking the dollar and euro transactions out of property purchasing and rentals.

As well as punishing local entrepreneurs, the move demonstrates just how tough the task of strengthening the TRY will be. Credit Agricole sees the currency weakening to 8.30 per dollar by the end of the year.