Turkey Hikes Interest Rate Again as Vote Looms

The Turkish central bank on Thursday hiked interest rates for the second time in two weeks, prompting the lira to rally strongly with elections on the horizon.

The 125 basis point (bps) headline interest rate hike comes after the bank raised its emergency rate by 300 bps on May 23.

On Thursday the bank said it would raise the one-week repo rate to 17.75 percent from 16.5 percent, after a monetary policy committee (MPC) meeting.

The hike was higher than the market consensus of 50 bps.

The one-week repo rate has been the bank's policy rate since June 1, after a long-awaited overhaul of its interest rates. 

The lira surged after the bank's announcement at 1100 GMT, gaining 1.5 percent against the dollar to reach 4.47 at 1330 GMT, after record lows last month.

Before the bank's move, the lira was at 4.58 against the greenback. Since January, the lira has lost over 18 percent against the dollar and over six percent in the past month.

The hikes come despite repeated calls for lower interest rates to stimulate growth by President Recep Tayyip Erdogan, who has called interest rates the "mother and father of all evil". Turkey's economy grew by 7.4 percent in 2017.

Erdogan also spooked investors last month after he signaled he wanted to take greater control over monetary and economy policy if he wins the June 24 elections.

But Inan Demir at Nomura International said in a note that the bank's recent moves including the hikes went "some way to helping the (central bank) rebuild its credibility" after investor concerns over monetary policy.

- 'Further tightening if needed' -

The hike is the bank's third such move since April 25 when the bank raised one of its then main interest rates by 75 basis points.

Markets hoped for a rise after the inflation rate jumped in May from 10.85 percent to 12.15 percent from the same period last year.

"The move is a tentative sign that the central bank may be shifting its focus away from simply shoring up the lira and towards tackling inflation," Jason Tuvey, senior emerging markets economist, said.

Gokce Celik, chief economist at Istanbul-based QNB Finansbank, said in a note that projections suggested annual inflation would increase further this month "and hover close to 14 percent" through the third quarter.

The bank said in a statement that the "tight stance" in monetary policy would be maintained until the "inflation outlook displays significant improvement."

"If needed, further monetary tightening will be delivered," the bank added.

Deputy Prime Minister Mehmet Simsek said on Twitter that inflation and Turkey's widening current account deficit would start to fall in the second half of the year.

"We are increasing the resistance of our economy against shocks with structural reforms," Simsek added.

- 'Too early' -

But Tuvey said despite the comments, "we think that it's too early to say that there has been a fundamental shift in policymakers commitment to bringing down inflation."

Turks will vote in parliamentary and presidential elections on June 24 in a surprisingly tight contest, with Erdogan seeking a second mandate as president.

Tuvey warned that if Erdogan was re-elected, he may decide to renew calls for lower interest rates and fulfil his pledge to take greater control over monetary policy.

"However, that would probably lead to a fresh sharp sell-off in the lira and, ironically, put pressure on the central bank to raise interest rates further," he said.