The Turkish Lira rallied to a four-month high on April 27 after a surprise policy tightening decision reassured investors about the Central Bank’s resolve on inflation, as reported by Reuters.
The lira strengthened 0.5 percent to reach 3.55 against the U.S. dollar, its firmest level since early January, after the Central Bank hiked the highest of its multiple interest rates on April 26 in an attempt to rein in double-digit inflation.
The Central Bank kept its main interest rate unchanged but continued to tighten monetary conditions by raising its late liquidity lending rate by 50 points. Facing persistently rising inflation, the Central Bank raised its late liquidity lending rate to 12.25 percent at its Monetary Policy Committee (PPK) meeting on April 26.
Annual inflation soared to 11.29 percent last month, the highest in 8.5 years, as currency weakness stoked a surge in food and transport prices. The latest hike and liquidity measures are expected to raise the weighted average cost of funding by 25 basis points to 11.75 percent.
But it may also reassure investors that the Central Bank may be able to tackle inflation without government interference.
“The move was surprising in the sense as it came at a time of relative stability in the lira given that the Central Bank seems to generally respond to lira weakness,” said İnan Demir, senior emerging market economist at Nomura, as quoted by Reuters.
“But it might still have a defensive element given that we will see next week the April inflation release ... and yesterday’s hike may be aiming to preempt that inflation increase and preempt an erosion of real rates into negative territory.”
He predicted inflation would rise to 12 percent.
Emerging currencies were all supported more broadly by the lack of specifics in U.S. President Donald Trump’s long-awaited U.S. tax cut plan.