Turkey fails to rally lira with rate hike

2 min

Ankara (AFP)

The Turkish central bank on Tuesday hiked its main interest rate by 75 basis points in a bid to boost the ailing lira but failed to impress markets looking for even sharper action.

The monetary policy committee of the bank said the overnight lending rate was being lifted to 9.25 percent from 8.5 percent, the second rate hike since November last year.

But the committee kept its one-week repurchasing (repo) rate unchanged at 8.0 percent while the overnight borrowing rate was kept at 7.25 percent.

But with markets hoping for even more and taken aback by the lack of any hike in the repo rate, the lira lost 1.25 percent against the dollar to trade at 3.8 to the greenback.

Some economists expected a hike of 100 basis points after the lira lost seven percent of its value against the dollar in the first four weeks of 2017 alone.

The lira has lost a quarter in value against the dollar over the last year.

In the announcement on its website, the bank said domestic demand in Turkey was on a "weaker" course, warning that a "significant rise in inflation" was expected in the short term.

The bank pointed to food price volatility as one of the main reasons for this feared rise. Earlier this month, inflation was reported at 8.5 percent in December, up from 7.0 percent the previous month.

"The committee decided to strengthen the monetary tightening in order to contain the deterioration in the inflation outlook," it said.

Economists said that the decision showed the bank was not convinced by the need for radical action to halt the plunge in value of the lira.

"We feel the bank still thinks that this Turkish lira depreciation will be a temporary one and its impact on inflation will be temporary," said Ozgur Altug, chief economist at BGC partners in Istanbul.