Turkish lira slides as Erdogan calls for lower interest rates

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Before the central bank's decision in Ankara, the run on the currency forced it to raise rates where it could without further damaging the prospects for economic growth.

Signs of movement in the US-China trade stand-off and a bumper interest rate hike in emerging market trouble spot Turkey sent world shares higher today.

Erdogan also issued a decree in the country's Official Gazette stipulating that transactions for property sale, rental, business and service contracts must be conducted in Turkish lira, rather than in foreign currencies. Investors are mainly concerned about Erdogan's economic policies and an ongoing diplomatic and trade dispute with the United States over the detention of an American pastor on espionage and terror-related charges.

Washington has imposed sanctions on two Turkish ministers and doubled tariffs on steel and aluminum imported from the country.

Several emerging markets have confronted the same struggles, dogged by a strengthening US dollar that makes it more hard for countries such as Turkey to pay back hefty external debt.

Analysts have called for Turkey to hike its key interest rate by as much as 10% to combat inflation, which is running at 16%. Erdogan warned on Friday that his patience with interest rates had limits.

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"The commercial banks were probably switching to more liquid assets, given what has happened to the lira", Jason Tuvey, a senior emerging markets economist at Capital Economics in London said by phone on Friday. Corporates have greatly borrowed in foreign currencies and with the meltdown of lira year-to-date, there might be an increasing number of corporate defaults and banking sector in problems, added Nordea Bank.

Erdogan, a self-described "enemy of interest rates", assumed new powers under an executive presidential system following an election in June and picked his son-in-law as finance minister. Growth slowed to an annual rate of 5.2% in the second quarter, from the first quarter's 7.4%.

While Erdogan said the central bank is independent and will take its own decision, his comments are spooking investors.

USA producer prices unexpectedly fell in August, recording their first drop in 1-1/2 years and denting talk of accelerating inflation following Friday's strong wage data. "I'm saying let's cut these high interest rates".

Erdogan has cast the lira crisis as an "economic war" targeting Turkey and has repeatedly urged Turks to sell their dollar savings to shore up the lira. The decree also forbade signatories from indexing their transactions to foreign currencies, while ordering existing contracts in other currencies to be switched to the lira by October 12. Subsequently, the lira lost about 25 percent of its value while Turkish authorities have taken a series of steps created to support the currency, with the central bank taking liquidity measures and the banking watchdog limiting derivative transactions.