Turkey’s central bank has dented hopes for a return to economic orthodoxy, ignoring calls from many investors to raise its main interest rate and sending the lira to a new record low.
The currency fell more than 2 per cent immediately following the decision to keep the benchmark one-week repo rate on hold and instead tweak the cost of borrowing through an obscure emergency facility.
The lira, which has lost about a quarter of its value against the dollar so far this year, teetered on the brink of the symbolic level of 8 to the buck after the decision. It later strengthened to TL7.963.
Phoenix Kalen, an emerging markets strategist at Société Générale, said a rise to the main rate would have sent “a credible signal” to investors that the central bank was “addressing the deterioration in inflation expectations and continuing with the gradual shift back towards more conventional monetary policy”.
“But clearly we did not see that,” Ms Kalen added, saying that the bank had instead returned to a strategy of “stealth tightening”.
The central bank has long been under heavy pressure from President Recep Tayyip Erdogan, a staunch opponent of high interest rates and who last year sacked the former governor, Murat Cetinkaya, following a disagreement over monetary policy.
However, the bank surprised markets last month by increasing its main one-week repo rate for the first time in two years. That move boosted the mood among analysts, most of whom expected policymakers to intensify efforts to steady the embattled lira and lure back much-needed foreign capital with a second rate rise on Thursday.
Instead, the bank announced it would keep that main rate on hold while instead lifting another rate, the late liquidity window, from 13.25 per cent to 14.75 per cent.
The bank has in recent months used the late liquidity window — which in normal times is usually reserved as an emergency facility — as a way of increasing the cost of funding to the Turkish financial system, and thereby supporting the lira, without announcing a large increase to its headline rate.
The average cost of funding has already risen to its highest level since December last year. Still, the news was greeted negatively by investors and analysts who had hoped that last month’s decision would mark a turning point.
“Political pressure is clearly making the [central bank] reluctant to enact further conventional rate hikes,” said Jason Tuvey, a senior emerging markets economist at the consultancy Capital Economics. “This will inflict fresh damage to its credibility and raises the risk of more abrupt falls in the lira.”
Timothy Ash, an analyst at BlueBay Asset Management, said the Turkish central bank “never seems to learn”. He added: “It seems like they will be stress-tested again after this failure to hike the base rate.”