Turkish Central Bank Raises Interest Rates; Lira Tanks More Than 2% Against US Dollar

The Monetary Policy Committee (MPC) of the Turkish central bank - lead by Governor Murat Cetinkaya and five other members - shocked currency markets today by raising overnight lending interest rates from 8.5 percent to 9.25 percent. News of the decision sent the Turkish lira crashing 2.25% against the dollar in the space of just five minutes!

The USD/TRY currency pair shot up to a daily high of 3.8286. The lira pared most of the initial losses in the hours following the announcement, however, at press time, Turkey’s currency is still trading 1 percent lower on the day.

The Turkish central bank also left the borrowing rate and one-week repo rate at 7.25 percent and 8 percent respectively.

Additionally, the MPC made the decision to raise the Late Liquidity Window Interest Rates, which commercial lenders are forced to borrow at, from 10 percent to 11 percent.

While the bank’s press release claims the Turkish economy is on a “partial recovery,” due to increased exports to the EU, the MPC also said the lira’s precipitous drop has lead to increased concerns regarding inflation:
“Yet, excessive fluctuations in exchange rates since the previous meeting have increased the upside risks regarding the inflation outlook.”
Furthermore, the Turkish central bank said further interest rate hikes will be necessary if excessive currency volatility returns:
“Inflation expectations, pricing behavior and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered. Moreover, necessary liquidity measures will be taken in case of unhealthy pricing behavior in the foreign exchange market that cannot be justified by economic fundamentals.”
Turkish monetary authorities, along with President Recep Tayyip Erdogan, have tried to stabilize the crashing Turkish lira over the last few months via several unorthodox means, including calling on patriotic Turks to purchase lira with foreign currencies.

Since the start of 2017, the lira’s exchange rate against the greenback has stabilized between 3.74 and 3.825, but it remains to be seen if this stability can be maintained throughout the rest of the year.