Turkey Raises a Key Rate by Less Than Expected; Lira Slumps

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Turkey’s central bank raised one of its main interest rates but by less than expected, while vowing to keep policy tight until the inflation outlook improves. The lira slid.

The bank increased its late-liquidity window by 50 basis points to 12.75 percent, compared with a median estimate 100-basis-point increase in a Bloomberg survey. The one-week repo, overnight lending and borrowing rates were kept at 8 percent, 9.25 percent and 7.25 percent, in line with surveys.

Since November, policy makers have been funding commercial lenders exclusively through the late-liquidity window, which is more expensive than Turkey’s three other key rates, in an effort to push up borrowing costs and boost the lira.

The rate increase comes after consumer inflation accelerated to the highest level since 2003, as a weaker lira combined with higher energy, food and transportation costs. Expectations of policy tightening strengthened again after data on Monday showed economic growth in the third quarter topping 11 percent, the fastest pace among the world’s 20 biggest economies.

Piotr Matys, a strategist at Rabobank in London, said that by taking such a modest step the bank may end up further undermining the currency.

‘Another Round’

“Today’s meeting could have been an opportunity to discourage speculators from betting against the lira by raising rates decisively,” he said by email. “Instead, the 50-basis-points move may reignite speculations that the central bank has very limited room to raise rates, which in turn leaves the lira exposed to another round” of attack.

The lira was trading 1.5 percent lower at 3.8694 per dollar at 2:36 p.m. in Istanbul.

Rate increases risk putting the bank on a collision course with Recep Tayyip Erdogan, who on Tuesday called pressure for an increase in borrowing costs a “vain effort.” He has long defended his unorthodox view that lower borrowing costs would better address price gains.

The monetary policy committee said it decided to tighten its policy stance as “current elevated levels of inflation and recent developments in cost factors have increased the risks on expectations and the pricing behavior.” A tight stance “will be maintained decisively until the inflation outlook displays a significant improvement and becomes consistent with the targets,” it added.

Failed Coup

Turkey increased spending on everything from wages to investments, and extended cheaper credit to companies to counter the impact of last year’s coup attempt on the economy. The annual comparison with the third quarter in 2016, when the attempt to topple Erdogan caused the economy to contract, helped boost the quarterly figures.

Ziad Daoud, a Dubai-based analyst with Bloomberg Economics, said Thursday’s decision means the central bank “may have just made its job harder.”

The “modest rate hike means it has more to do in 2018 to combat elevated inflation,” Daoud said by email. “The central bank will probably need to lift borrowing costs by at least another 150 basis points next year but government criticism is likely to intensify as growth slows and fiscal stimulus fades.”



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