By Bahattin Gonultas and Muhammed Ali Gurtas
ANKARA
Turkey’s Central Bank Tuesday hiked its overnight lending rate, the highest of the multiple rates it uses to set policy, by 75 points following the Turkish lira’s sharp fall against the U.S. dollar.
The overnight lending rate, the rate banks use to borrow from the Central Bank overnight, rose from 8.50 percent to 9.25 percent, in line with expectations.
However, Turkey’s overnight borrowing rate, under which banks lend or deposit money to the Central Bank, remained unchanged at 7.25 percent.
The one-week repo rate, known as policy rate, was also kept at 8 percent, the bank said.
In late liquidity window interest rates – between 4 p.m. (1300 GMT) and 5 p.m. (1400 GMT) – the borrowing rate was kept at zero percent and the lending rate was raised from 10 to 11 percent.
Deputy Prime Minister Mehmet Simsek said on Twitter that the bank's decision was a positive one for fighting inflation.
"Central Bank tightens monetary policy and says it is ready to tighten further. Price stability remains the top priority," Simsek said in a tweet.
Partial recovery seen
Enver Erkan, an economist from Kapital FX, said that the bank is pursuing a temporary solution rather than a permanent tightening policy.
"Short-term interest rates have become almost parallel to long-term interest rates. This may lead to unhealthy price movements in the coming period due to the deterioration in the yield curve," Erkan said.
Erkan added that the bank's decision had exacerbated uncertainty about the Central Bank's monetary policy.
"The markets are not sure about the next step of the bank. Obviously, unknown policy of the Central Bank will not lead a very positive trend in Turkish financial assets."
The bank said in a statement that recent data indicates a partial recovery in economic activity.
"Demand from European Union economies continues to contribute positively to exports, while domestic demand displays a weaker course. With the supportive measures and incentives provided recently, the recovery in economic activity is expected to continue at a moderate pace," the statement said.
"The committee assesses that the implementation of structural reforms would contribute to the potential growth significantly," it added.
"Aggregate demand" developments support disinflation, the bank said.
"Yet, excessive fluctuations in exchange rates since the previous meeting have increased the upside risks regarding the inflation outlook," it said.
The Turkish lira has lost more than 20 percent of its value against the greenback since last November.
"The significant rise in inflation is expected to continue in the short term due to lagged pass-through effects and the volatility in food prices. Accordingly, the committee decided to strengthen monetary tightening in order to contain deterioration in the inflation outlook," the bank also said.
The bank vowed that it would continue to use all available instruments in pursuit of its price stability objective.
Hawkish on inflation
Gokhan Ozkan, research analyst at Isik Menkul, said the bank is continuing to try alternative instruments instead of raising interest rates, and added, "The first reactions to the exchange rate are a sign of unfulfilled market expectations."
"Actually, the current level stands behind the real interest rates. We will see whether the bank's actions with an additional tightening of the monetary policy will be sufficient to keep price stability under control," Ozkan said.
"Because the bank is expecting a further increase in inflation, and is seeking more time to handle the real interest rates issue," he added.
"The bank kept the door open for further tightening. The rate statement showed that the committee’s assessment of the inflation outlook turned more hawkish due to excessive fluctuations in exchange rates since the previous meeting," said Gokce Celik, chief economist at QNB Finansbank.
Celik stressed that the bank had already tightened monetary conditions against a backdrop of weaker economic activity, but that hiking the rates further would probably take another round of sharp depreciation.
"Until then, the bank will be content with a combination of the existing corridor parameters and non-interest rate tools," she added.
The bank added that its future monetary policy decisions would depend on the inflation outlook.
"Inflation expectations, pricing behavior, and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered. Moreover, necessary liquidity measures will be taken in case of unhealthy pricing behavior in the foreign exchange market that cannot be justified by economic fundamentals," it said.
The move came after the bank refrained from holding its one-week repo auction for the ninth time in a row during the second day of trading on Tuesday.
The bank has been skipping the auction – where local banks borrow Turkish liras from the Central Bank – to stem the sharp decline in the lira’s value against other currencies.
A repo auction has not been held since Jan. 12. The bank signaled it would keep skipping the practice until volatility in foreign exchange rates calms down.
After the hike, the lira fell 1 percent against the dollar from around 3.7360 to 3.82, but the lira recovered to 3.7580 around 5 pm.
