On Sep 13, the Central Bank of Turkey hiked its main interest rate to 24%, a hike of 6.25% from the previous 17.75%. This resulted in lira appreciating by 4.3% against the U.S. dollar and iShares MSCI Turkey ETF (TUR – Free Report) gaining 5.9% on the same day. This is the biggest rate hike in President Erdogan’s 15-year rule. The rates have been hiked by 11.25% since late April.

Investors should note that the Turkish lira has plunged more than 40% this year. This fall is considered to be a result of Erdogan’s influence on monetary policy and dispute with Trump administration that has caused a series of tit-for-tat sanctions and trade restrictions.

The row started in March when President Trump wanted to impose tariffs on import of steel and aluminum of 25% and 10%, respectively, which were subsequently implemented. In July, President Trump demanded the release American Pastor Andrew Brunson, arrested on terror-related charges by Turkey. However, this demand went unfulfilled, which was followed by Trump imposing sanctions on two Turkish ministers and doubling of tariffs imposed in March. Turkey has imposed tariffs on several U.S. products like rice, hard alcohol, leaf tobacco, cosmetics and cars.   

President Erdogan has been against the rate hikes as he sees the same as an obstacle to the country’s growth. Inflation is at a 15-year high level of 18% and cost of imports have spiked for the business houses in Turkey.

Finance Minister Berat Albayrak said on Sep 13 that this rate hike was an indication of the independent functioning of the apex bank and announced that the medium-term economic program would be announced on Sep 20.

“If needed, further monetary tightening will be delivered,” the bank said in a statement.

President Erdogan and his government have been urging their fellow citizens to sell their foreign currency savings and do property and sales agreements in the domestic currency. He is seeing this crisis as illusory and could be overcome with unity among the Turks.