Turkey's central bank hikes top rate by a more-than-expected 75 basis points

ISTANBUL - 25 April 2018: Turkey’s central bank raised the highest of the four interest rates it uses to set policy by 75 basis points on Wednesday - its first hike in four months - after President Tayyip Erdogan called snap elections for June.

Erdogan last week announced presidential and parliamentary elections on June 24, bringing the polls forward more than a year, saying Turkey needed to switch quickly to a new executive presidency system due to the economic challenges it faces and developments in Syria.

The central bank’s efforts to rein in double-digit inflation have been complicated by a sharp sell-off in the lira currency, which has hit a series of record lows this year. Investors have dumped the lira on widening concern about Erdogan’s drive for lower interest rates.

“Today’s rate hike is a step in the right direction and shows Erdogan’s decision to call a snap election has placed a heavy premium on the stabilisation of the wilting lira,” said Nicholas Spiro, a partner at Lauressa Advisory in London.

“Yet the fact remains that it will take a sharper and sustained tightening in monetary policy to rein in inflation and restore confidence in the lira. The central bank’s credibility is still badly damaged.”

The bank lifted its late liquidity window rate to 13.5 percent from 12.75 percent. It left the benchmark repo rate unchanged at 8 percent.

The lira firmed as far as 4.0307 after the announcement from around 4.1177 beforehand.

‘MEASURED TIGHTENING’

“Current elevated levels of inflation and inflation expectations continue to pose risks on the pricing behaviour. Upside movements in import prices have increased such risks,” the central bank’s monetary policy committee said in a statement.

“Accordingly, the committee decided to implement a measured monetary tightening to support price stability.”

Ten of thirteen economists in a Reuters poll had forecast a late liquidity window rate hike, with four predicting a rise of 50 basis points. Three economists each had foreseen hikes of 25 and 75 basis points. Another three predicted it would leave the late liquidity window rate untouched.

The bank stuck to similar language in its statement as in past releases - reiterating that it would maintain a tight stance until an improvement in the inflation outlook.

“Past experience shows that this guidance meant the central bank will choose to remain on hold unless the lira comes under pressure,” said Inan Demir, senior emerging markets economist at Nomura International.

The bank’s reluctance to aggressively tighten policy in the face of double-digit inflation has increased concern that it is under pressure from Erdogan, helping send the lira to a series of record lows.

Inflation hit a 14-year high of 12.98 percent in November but has since eased somewhat to 10.23 percent. The central bank’s latest survey showed economists’ inflation expectations for the year-end have worsened in the last month - to 10.07 percent, from 9.49 percent.

It remains well above the bank’s target of 5 percent.

The bank kept the overnight lending rate at 9.25 percent and the overnight borrowing rate at 7.25 percent.