Turkish cenbank hikes rates more than expected to 19pc

ISTANBUL: Turkey's central bank hiked rates by 200 basis points to 19% on Thursday, twice the market expectation in what it called a "front loaded" move to head off rising inflation and a sliding lira, which rallied 2%.

The decision had been seen as a test of new Central Bank Governor Naci Agbal's inflation-fighting credentials and hawkish recent rhetoric, given President Tayyip Erdogan's repeated opposition to tight policy.

In a Reuters poll, almost all of the 21 economists expected a 100-point rate hike. The lira responded with a 2% jump against the dollar to 7.36, its strongest level in two weeks.

The key one-week repo rate is the highest of any big economy and it is back to levels last touched in mid-2019. It had stood at 17% since December after aggressive monetary tightening last year.

Market expectations for a hike shot up after US bond yields jumped and the lira lost as much as 10% since mid-February. Inflation also rose more than expected to nearly 16% last month, well above a 5% target.

The bank's policy committee said it "decided to implement a front-loaded and strong additional monetary tightening." It again promised a tight stance would be held "decisively" for an extended period and promised more rate hikes if needed.

The central bank has now tightened policy by 875 basis points since Erdogan appointed Agbal in November, when the lira touched a record low. It had rallied 20% after the appointment.

Erdogan frequently calls for lower borrowing costs and he abruptly fired the last two bank chiefs, raising concerns over monetary independence. But he appointed Agbal as part of a surprise leadership overhaul in which he pledged a new market-friendly economic era.

"Exceeding (market) expectations was definitely the most efficient way to encourage foreign investors to restore their bullish bets on the lira," said Piotr Matys, senior emerging markets forex strategist at Rabobank.

The global bond rout hit Turkey harder than most emerging markets due to the credibility concerns and narrowing real rates, which have stoked dollarization. Locals' hard currency holdings hit a record $236 billion last month.

Rate cuts are expected in the second half of the year when inflation should dip. Annual CPI was at mid-2019 levels last month and has been in double digits most of the last four years.

Rising energy prices and higher demand as lockdowns are eased, as well as lira weakness, have driven price rises. Currency depreciation raises inflation in import-dependent Turkey.

Still, inflation is within the central bank's forecast range and Agbal says it will hit the 5% target by end-2023.