Turkish lira nosedives as central bank holds benchmark rate

By bne IntelliNews January 24, 2017

Turkey's central bank on January 24 left its benchmark interest rate on hold, causing the Turkish lira to immediately nosedive by 1.6% against the dollar and disappointing investors who saw the monetary policy decision as a missed chance to demonstrate the regulator's independence from government pressure.

The lira sank to 3.8019 immediately after the central bank announced it would keep its benchmark one-week repo rate at 8%, defying market expectations for a 50bps hike. Analysts will now revisit the issue of whether the bank's board is responding to pressure from Turkish President Recep Tayyip Erdogan and government leaders who insist the Turkish economy needs lower rates that would further open the credit taps. Given Turkey's rising inflation, that approach flies in the face of economic orthodoxy, according to observers.

In its statement on the latest decisions from the central bank monetary policy committee (MPC), the national lender added that it had increased the overnight lending rate from 8.5% to 9.25%, while leaving the overnight borrowing rate at 7.25%. It increased the late liquidity window rate from 10% to 11%.

By 14:40 local time, the lira had recovered some ground to trade at 3.7879 per dollar.

The currency has been under strong selling pressure because of a toxic combination of political uncertainties, geopolitical risks and economic woes. The battered lira has fallen nearly 7% since the start of the year, making it one of the worst performing emerging market currencies.

The central bank has tried to stop the lira’s decline by tightening liquidity conditions, but the impact of these measures proved short-lived and thus failed to support the currency.

“We expect Turkey’s central bank to hold the benchmark repo rate unchanged on 24 January as political pressure to keep the economy growing prevails. A 50-100bp ‘cosmetic’ hike is still likely,” Danske Bank said in a commentary released on January 24, ahead of the MPC meeting.

Now, all eyes will turn to Fitch Ratings which is expected to announce its rating review of Turkey on January 27. Two other major rating companies Standard & Poor’s and Moody’s Investors Service downgraded Turkey to junk in 2016, leaving Fitch as the only agency keeping the country at investment grade. A downgrade may exert further pressure on the lira.

“Inflation expectations, pricing behaviour and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered,” the bank said in a statement released after the MPC meeting. “Moreover, necessary liquidity measures will be taken in case of unhealthy pricing behaviour in the foreign exchange market that cannot be justified by economic fundamentals.”

The bank also said it would continue to use available instruments in pursuit of the price stability objective. But, it warned that “the significant rise in inflation is expected to continue in the short term due to lagged pass-through effects and the volatility in food prices”.

The bank expected the recovery in economic activity to continue at a moderate pace, noting that: “Demand from the European Union economies continues to contribute positively to exports, while domestic demand displays a weaker course.”

Earlier this month, the World Bank slashed its 2017 GDP growth projection for Turkey to 3% from its previous forecast of 3.5%, citing political uncertainties and financial market volatility. The government’s GDP growth estimates for this year and next year are 4.4% and 5%, respectively.

Turkish Central Bank Policy Rates (%)
Date one-week repo Date overnight borrowing overnight lending Date late liquidity borrowing late liquidity lending
May-10 7.00 Aug-13 3.50 7.75 Jul-13 0.00 10.25
Dec-10 6.50 Jan-14 8.00 12.00 Jan-14 0.00 15.00
Jan-11 6.25 Jul-14 7.50 12.00 Apr-14 0.00 13.50
Aug-11 5.75 Aug-14 7.50 11.25 Aug-14 0.00 12.75
Dec-12 5.50 Feb-15 7.25 10.75 Feb-15 0.00 12.25
Apr-13 5.00 Mar-16 7.25 10.50 Mar-16 0.00 12.00
May-13 4.50 Apr-16 7.25 10.00 Apr-16 0.00 11.50
Jan-14 10.00 May-16 7.25 9.50 May-16 0.00 11.00
May-14 9.50 Jun-16 7.25 9.00 Jun-16 0.00 10.50
Jun-14 8.75 Jul-16 7.25 8.75 Jul-16 0.00 10.25
Jul-14 8.25 Aug-16 7.25 8.50 Aug-16 0.00 10.00
Jan-15 7.75 Sep-16 7.25 8.25 Sep-16 0.00 9.75
Feb-15 7.50 Nov-16 7.25 8.50 Nov-16 0.00 10.00
Nov-16 8.00 Jan-17 7.25 9.25 Jan-17 0.00 11.00
Jan-17 8.00            
source: tcmb

Related Articles

Turkey easily tops table for Twitter content removal requests

Turkey accounted for more than half of all content removal requests received worldwide by Twitter during the second half of 2016, according to the social media company’s ... more

Europeans everywhere "won’t safely walk the streets", Erdogan says in Ankara speech

Turkish President Recep Tayyip Erdogan continued his war of words with EU governments on March 22, remarking ... more

Turkish Airlines' share price falls further after UK follows US with electronics flight ban

The share price of Turkish Airlines (THY) was down 2.88% by the end of trading on March 21 after the UK joined the US in banning electronic devices larger than smartphones in hand luggage on flights ... more

Register here to continue reading this article and 2 more for free or purchase 12 months full website access including the bne Magazine for just $119/year.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

Thank you. Please complete your registration by confirming your email address.
A confirmation email has been sent to the email address you provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

If you have any questions please contact us at sales@intellinews.com

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at sales@intellinews.com

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

Thank you. Please complete your registration by confirming your email address.
A confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.

Dismiss