The Central Bank of the Republic of Turkey (CBRT) increased its policy rate Thursday by 1.25 percentage point from 16.5 to 17.75 percent, above the 100 basis points hike expectation by markets.
Following CBRT’s move, Turkish lira gained nearly two percent against the U.S. dollar with the rate decreasing from 4.58 to 4.45 level.
Concerns about monetary policy and doubts over the bank’s ability to rein in double-digit inflation have sent the currency down some 16 percent this year.
To stem the sell-off, the bank hiked rates by 3 percentage points at an emergency meeting last month and said it would return to a single policy rate. Investors have been expecting further tightening, particularly after data on Monday showed annual inflation quickened to 12.15 percent in May.
Eleven out of 16 economists polled by Reuters had predicted the bank would hike its one-week repo rate, with five each forecasting increases of 50 and 100 basis points. One economist predicted an increase of 75 basis points while five forecast no change.
The bank’s move to a single rate – it had for years used a complex system of multiple rates to set policy – was something long sought by investors. Its other rates, including the late liquidity window, are now directly derived from the benchmark rate, meaning policy should be more predictable.
Turkey’s economy expanded 7.4 percent last year and President Recep Tayyip Erdogan, who faces presidential and parliamentary elections on June 24, wants to maintain growth by encouraging spending with cheap borrowing costs through low interest rates.
However, the upcoming elections, global uncertainties topped with strong performance of the U.S. economy and Federal Reserve’s expected interest rate hikes increase the risks for foreign investors in Turkish markets.