Lira firms as Turkey’s Central Bank makes decisive hike to key interest rate

Lira firms as Turkey’s Central Bank makes decisive hike to key interest rate

Lira firms as Turkey’s Central Bank makes decisive hike to key interest rate

Turkey’s Central Bank raised its benchmark rate more than estimates by 125 basis points to 17.75 percent on June 7, following a dramatic increase last month, after inflation spiked.

The Bank signaled that it would tighten monetary policy further if needed.

The Turkish currency rallied some 2 percent against the dollar after the move, while bond yields fell and stocks advanced. The lira, which firmed to 4.4560 against the dollar following the decision from 4.5799 directly before, was at 4.4740 as of 1212 GMT.

Elevated levels of inflation and inflation expectations continue to pose risks on pricing behavior, the Bank said in a statement, adding that it would tighten monetary policy more if needed.

“The Committee decided to further strengthen monetary tightening to support price stability,” the Bank said.

Eleven out of 16 economists polled by Reuters had predicted the Bank would hike its one-week repo rate, with five each forecasting increases of 50 and 100 basis points. One economist predicted an increase of 75 basis points while five forecast no change.

To stem the sell-off, the Bank last month hiked rates by 3 percentage points at an emergency meeting and said it would return to a single policy rate to ease a dramatic decline in the lira’s value amid rising concerns about the independence of the Central Bank. Investors have been expecting further tightening, particularly after data on June 4 showed annual inflation quickened to 12.15 percent in May.

‘A strong hawkish move’

The Bank’s move to a single rate - it had for years used a complex system of multiple rates to set policy - was long sought by investors. Its other rates, including the late liquidity window, are now directly derived from the benchmark rate, meaning policy should be more predictable. 

“To our mind, raising interest rates by 125 basis points is a strong hawkish signal that the central bank is fully committed to regain control over inflation by trying to stabilize the lira,” said Piotr Matys, emerging markets forex strategist at Rabobank, as quoted by Reuters.

“Over the long-term horizon, what will be crucial is to deal with economic imbalances in Turkey,” he added, citing persistently high inflation and a widening current account deficit.

Just after the release of the Central Bank’s rate decision, Deputy Prime Minister Mehmet Şimşek vowed that the policy set would continue to be strengthened, adding that inflation and current account deficit would slow down in the second half of the year.

“Our economy has become more resilient to any shocks thanks to the structural reforms. Foreign demand will continue to give a boost to the growth in a robust manner,” Şimşek tweeted.

He earlier the week blamed exchange rate shocks, high oil prices, tensions with European countries and the U.S., and Turkey’s fight against terror for the rise in inflation rate.

Turkish Lira,