Turkey Raises Rates for First Time Since 2011 on Lira Slide

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Turkey’s central bank raised interest rates for the first time in almost two years after the lira slumped to a record low this month.

The bank increased its overnight lending rate by 75 basis points to 7.25 percent today, and said that “additional monetary tightening will be implemented when necessary.” It kept its benchmark one-week repo rate and overnight borrowing rate unchanged at 4.5 percent and 3.5 percent respectively, according to an announcement on its website.

The currency has been rallying since the central bank on July 15 signaled its intention to increase rates for the first time since October 2011. That announcement came amid mounting speculation that the U.S. Federal Reserve will begin cutting its monetary stimulus, threatening capital inflows to higher-yielding, riskier emerging markets such as Turkey.

“The lira should take a breather in the mid-run with wider overnight rate corridor,” Ipek Ozkardeskaya, a currency strategist at Swissquote Bank SA in Geneva, said in e-mailed comments. The bank may also increase the benchmark rate in the future to curb inflation, she said.

Turkey’s central bank says its rates corridor policy, which allows it to switch funding between its various rates on a daily basis, gives it flexibility in times of economic uncertainty.

Biggest Banks

The bank also said today that it would eliminate a 50 basis-point discount for primary dealers, the country’s biggest banks, on days when it offers funding only at the top end of the corridor. That would make the effective increase in costs for the main banks 125 basis points on those days.

The median estimate in a Bloomberg survey of 10 economists forecast that the bank would raise the lending rate to 7 percent. All of the economists predicted the two other rates would remain unchanged.

The lira was trading at 1.9108 per dollar at 5:10 p.m., little changed from yesterday’s close. It has declined 6.6 percent this year, the second-worst performer among emerging-market currencies in Europe, Africa and the Middle East after South Africa’s rand. Yields on two-year benchmark lira bonds rose three basis points to 8.86 percent.

The central bank said it will follow a “cautious” policy until inflation is in line with medium-term targets. Inflation accelerated to a nine-month high of 8.3 percent in June. The year-end inflation target is 5 percent.

“The tone of the statement seems relatively hawkish,” emphasizing slower capital inflows, above-target credit growth and higher inflation, Ibrahim Aksoy, an economist at Seker Invest in Istanbul, wrote in e-mailed comments.