Turkish lira gain ground on interest rate hike

Turkish lira rallied against other exchange rates as Turkish stocks gained ground on Thursday Nov. 19 following an interest rate hike by the country’s Central Bank.

In line with market expectations, the bank raised its one-week repo rate - also known as its policy rate - by 475 basis points to 15 percent.

It also decided to provide all funding through this rate, which it identified as its main policy rate.

The lira rose by around 2.5 percent against the U.S. dollar as soon as the move was announced. The U.S. dollar/Turkish lira exchange rate stabilized below the 7.60 mark, decreasing by more than 1.3 percent from the previous close.

The country’s benchmark stock index surpassed 1,300 points with the backing of strong buying, up 0.9 percent from the previous close and 1,284 points from before the pre-hike level.

The hike met market expectations for an increase that would help support the lira and contain inflation.

This was absolutely the right and logical decision, said Timothy Ash, senior EM sovereign strategist at Bluebay Asset Management in London.

There is even a chance here of foreign portfolio guys putting money back in and a reversal of dollarization, he added.

The decision was announced in a statement following the bank’s first policy meeting under its new governor, former Finance Minister Naci Ağbal, who was appointed on Nov. 7.

Ağbal’s appointment was followed by the resignation of Finance Minister Berat Albayrak, who was later replaced by Lütfi Elvan, a former deputy prime minister.

The policy meeting was being closely watched after President Recep Tayyip Erdoğan last week promised reforms and a new era in the management of the economy to attract foreign investments.

In a statement, the bank identified the “lagged” effects of depreciation in the Turkish lira, as well as increasing international food prices and worsening inflation expectations as factors that have adversely affected the country’s inflation outlook.