Amid a currency crisis, Turkey's central bank vows to step in to contain rampant inflation

KEY POINTS

• Turkey's lira has lost around 40 percent of its value against the U.S. dollar so far this year, driving up the cost of basic domestic goods and prompting investor panic over the potential impact on the wider economy.
• "Recent developments regarding the inflation outlook indicate significant risks to price stability. The central bank will take the necessary actions to support price stability," the bank said.
• Turkey's lira was trading at around 6.6154 against the dollar at 12:40 p.m. London time (7:40 a.m. ET), recovering some of its losses immediately after the central bank's announcement.

Yellow cabs sit at a taxi rank near buildings decorated with Turkish national flags in Istanbul, Turkey, on Tuesday, July 19, 2016. 

Bloomberg | Bloomberg | Getty Images

Turkey's central bank has promised to review monetary policy later this month, after data showed inflation had surged to its highest level in nearly 15 years.

In a statement likely to heighten expectations of a rate hike amid a currency crisis, the bank said Monday that action would be necessary to combat "significant risks to price stability."

Turkey's lira has lost around 40 percent of its value against the U.S. dollar so far this year, driving up the cost of basic domestic goods and prompting investor panic over the potential impact on the wider economy.

"Recent developments regarding the inflation outlook indicate significant risks to price stability. The central bank will take the necessary actions to support price stability," the bank said.

"(The) monetary stance will be adjusted at the September monetary policy committee meeting in view of the latest developments," it added.

'Enemy of interest rates'

The news came just after official data showed inflation rose to 17.9 percent year-on-year in August, comfortably beating market expectations and marking its highest level since late 2003.

Many emerging market participants will expect Turkey's central bank to raise interest rates next week in order to tame rampant inflation in the country. However, the bank opted to keep rates unchanged at 17.75 percent in July, mystifying investors and sending the lira sharply lower.

Meanwhile, President Recep Erdogan — who has previously described himself as an "enemy of interest rates" — wants to see lower benchmark rates to keep credit-fueled growth on track.

Turkey's lira was trading at around 6.6154 against the dollar at 12:40 p.m. London time (7:40 a.m. ET), recovering some of its losses immediately after the central bank's announcement.