Turkey raises interest rates more than expected and lira soars

The lira surged after Turkey’s central bank hiked interest rates more than forecast, driving home governor Naci Agbal’s pledge to tame inflation and defend the currency.

The monetary policy committee lifted the one-week repo rate to 19%, double the 100-basis-points hike predicted in a Bloomberg survey of 24 analysts. That sparked the biggest intraday advance in more than a week for the lira, making it the best performer in emerging markets on Thursday.

Despite “political pressure” against further increases, Agbal “delivered a resounding home run”, said Phoenix Kalen, London-based director of emerging-market strategy at Societe Generale.

The increase “will go a long way towards bolstering both retail and foreign-investor confidence that the central bank under governor Agbal will stay engaged in addressing deterioration in inflation expectations”, she said.

The pace of price growth in Turkey accelerated for a fifth month in February as oil rallied and the effect of 2020’s lira weakness lingered. The currency has taken the worst hit among peers from climbing US treasury yields, and its 8% drop since mid-February added to calls for Agbal to backstop the market with higher rates.

Inflationary risks prompted a “front-loaded and strong additional monetary tightening”, the central bank said in a statement accompanying its decision.

Oil prices skyrocketed from below $20 a barrel at the height of global coronavirus lockdowns last year to nearly $70, adding to a range of inflationary pressures building in the economy.

After taking over in November, Agbal ended a complicated funding structure and hiked the one-week repo rate by 675 basis points, boosting the bank’s credibility among investors.

Despite the recent decline, the lira has strengthened about 14% under his watch, as expectations grow that Turkey’s returning to more orthodox monetary policy. He stood pat in the first two meetings of 2021, opting for hawkish messages.

The governor has pledged to maintain a tight monetary policy stance until he meets his 5% inflation target, no earlier than 2023. The Turkish statistics agency will publish March inflation data on April 5.

Thursday’s hike removes “any doubts on credibility,” said Onur Ilgen, the head of treasury at MUFG Bank Turkey in Istanbul. “This strong action will definitely help lira to gain in coming weeks.”

Bloomberg