Dec 14 2017

Turkish central bank raises rates less than expected, lira drops

Turkey’s central bank raised a key interest rate by less than investors expected amid political pressure to support economic growth. The lira dropped.

The bank in Ankara raised the rate it charges banks in its late liquidity window by 50 basis points to 12.75 percent, It kept other interest rates unchanged, according to a statement on its website on Thursday.

The central bank is seeking to curb inflation and losses for the lira while avoiding big increases in rates. Inflation accelerated to 13 percent in November, almost triple its target of 5 percent.

In its statement, the bank said that there were still risks posed by inflation and it remained ready to raise rates further if needed.

The lira fell to 3.88 per dollar after the decision. The currency had strengthened to 3.84 per dollar from a record low of 3.98 per dollar three weeks ago, paring losses since September to 11 percent. Three-month forward rates, an indicator of a currency's future value, showed the lira at almost 4 per dollar.

Some investors had called on the bank to increase interest rates by as much as 500 basis points. The average estimate among economists was for a 100 basis-point increase.

"I think the market assumed the central bank would do the decent thing and hike, meaningfully," Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said in e-mailed comments to clients. "This muted hike leaves Turkish markets exposed again." 

Local analysts including Erkin Şahinöz, a former economist at the Federal Reserve Bank of Cleveland, said this week that the bank should refrain from raising rates entirely unless the lira weakens to beyond 4 per dollar.

(This story is an update of a previous version, adding comments from analysts)

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