Turkey’s central bank has dented hopes for a return to economic orthodoxy, pushing the lira to a new record low, after ignoring calls from many investors to raise its main interest rate.
The Turkish lira fell as much as 2.1 per cent 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 currency, which is down more than 20 per cent against the dollar this year, teetered on the brink of the symbolic threshold of 8 to the buck after the decision. It recently traded at TL7.979.
Phoenix Kalen, an emerging markets strategist at Société Générale, said a rise to the main rate would have sent “a credible signal to the market that they were willing to hike explicitly the benchmark repo rate, that they were addressing the deterioration in inflation expectations and continuing with the gradual shift back towards more conventional monetary policy”, she said. “But clearly we did not see that.”
“It sends quite a negative signal to the markets,” she added. “Now it seems like they are going back to a strategy of relying on stealth tightening. It is a shift backwards towards that more secretive, more opaque strategy. The market doesn’t like that lack of transparency.”
The central bank has long been under heavy pressure from President Recep Tayyip Erdogan, a staunch opponent of high interest rates 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 double down on 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 that channel, 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 without announcing a large increase to its headline rate. The overall cost of funding has already risen to its highest level since December last year.
Still, the news was greeted negatively by investors who had hoped that last month’s decision would mark a turning point. 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.”