Turkish lira shoots up after a 25 per cent rate hike

Turkiye’s central bank increased its benchmark interest rate by a higher-than-anticipated 750 basis points to 25 per cent on Thursday, igniting a rare lira rally and indicating a renewed commitment to combating rising inflation as part of a broader policy U-turn.

The unexpected move has resulted in the policy rate reaching its highest level since 2019 and the Turkish Lira is at its highest level since mid-July. Since June, the bank has increased the TRINT=ECI one-week repo rate by 1,650 basis points.

The policy committee reiterated that it would tighten “as much as needed in a timely and gradual manner” to lower inflation, which jumped to nearly 48 per cent last month. The committee included three members participating for the first time who are viewed as having hawkish sway.

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After years of unconventional policies under President Tayyip Erdogan, analysts said the shift was the clearest one yet toward more conventional measures and could help control inflation.

In the days leading up to the policy announcement, as well as in previous weeks, the lira experienced nearly daily new all-time lows. But it then increased by more than three per cent in relation to the dollar and peaked at 26.41 at 12:05 GMT.

According to Tradeweb data, the price of the government’s dollar-denominated bonds increased by more than two cents, while Turkish bank stocks increased by almost 10 per cent, supporting the larger Istanbul Stock Exchange.

A Reuters poll of analysts found that they anticipated a median increase of 250 basis points from the previous 17.5 per cent, with some even anticipating a more dovish decision given the bank’s performance over the previous two months.

As per the poll conducted in the last week, the interest rates were not anticipated to rise to 25 per cent until the end of the year.

The rate hike “sends a very strong signal that the (bank) is determined to rein in inflation and the initial market response is very positive,” Reuters quoted Piotr Matys, a senior FX analyst at In Touch Capital Markets, as saying.

He also said, “at least some investors will be wondering whether the 750bps hike has been approved by President Erdogan.”

(With inputs from Reuters)

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