Turkish lira dips on dovish central bank; Rouble hit by US sanctions

Turkey's lira fell on Thursday after the central bank held rates but shied away from reaffirming a pledge to tighten policy, while Russia's rouble plummeted after Washington announced new sanctions on the country.

The lira shed 0.7% after the central bank held rates steady at 19%, but dropped a pledge to tighten policy further as needed.

It was the first monetary policy decision since President Tayyip Erdogan last month replaced hawkish governor Naci Agbal with Sahap Kavcioglu, who shares Erdogan's unorthodox view that high interest rates cause inflation, sparking a market selloff.

"What is reassuring is that there's a bit of continuity from the old governor, with rates on hold and still a hawkish message," said Nikolay Markov, senior economist at Pictet Asset Management.

"I'm not sure if it will be enough to stabilise the lira in the short-term, but will help keep Turkey afloat, especially if they keep the policy rate unchanged before June. If there is any change, it could be catastrophic."

Erdogan has repeatedly called for monetary stimulus and has fired three bank chiefs in two years, eroding monetary credibility.

Turkish inflation is currently well above the central bank's targets, and has held back an economic recovery from the COVID-19 pandemic.

Other emerging market currencies strengthened slightly, with the US dollar retreating ahead of March retail sales data, which is likely to jump from the prior month.

"The figure should help to cement the "risk-on" mood and therefore perhaps be good for stocks but negative for the dollar," Marshall Gittler, head of investment research at BDSwiss, wrote in a note.

The rouble weakened nearly 2% to the dollar, erasing most of its gains this week after the United States announced sanctions on Russia for alleged election interference and malicious cyber activity.

The sanctions include new prohibitions on certain dealings in Russian sovereign debt, as well as targeted sanctions on Russian technology companies.

The move marks further deterioration in ties between Russia and the West, which were already under stress from NATO scrutiny of Russian military actions in eastern Ukraine.

Russian dollar-denominated bonds plunged, while the rouble and Russian stocks were the worst performers across Europe, the Middle East, and Africa on Thursday. Turkish stocks traded slightly lower, while most other EMEA bourses retreated from initial gains.

Central European currencies dipped against the euro, while stocks in the region traded flat.