Turkish Lira weakens as Central Bank hikes top rate less than expected

ANKARA

Turkey’s Central Bank raised its late liquidity window rate by 0.50 basis points on Dec. 14 after a U.S. Federal Reserve hike, but left its main policy rate on hold, which was followed by a fall in the Turkish Lira’s value.

The bank raised the late liquidity window rate to 12.75 percent from 12.25 percent, less than the 100-basis-point hike which had been predicted by 20 economists polled by state-run Anadolu Agency.

But it left its overnight lending rate at 9.25 percent and its benchmark one-week repo rate at 8 percent unchanged.

The repo rate has stood at 8 percent since November 2016.

In its statement, the Central Bank left the door open to an interest rate hike in the future, saying its “tight monetary policy stance” would be maintained until the inflation outlook shows a “significant” improvement.

Inflation hit its highest annual rate since 2003 last month at 12.98 percent.

“Inflation expectations will be closely monitored and, if needed, further monetary tightening will be delivered,” the bank said.

The bank will continue to use all available instruments in pursuit of the price stability objective, it added.

The Central Bank employs multiple interest rates.

Its move followed the Federal Reserve’s decision to raise interest rates by a quarter of a percentage point in a third hike in 2017.

The late liquidity window rate is the lending facility provided by the Turkish Central Bank for banks to enable them to make use of their excess liquidity at the end of the day.

The lira - which has lost over 30 percent in value against the dollar over the last two years - fell 1.62 percent in value to trade at 3.87 to the greenback after the bank’s move.

The decision comes after Turkey posted growth of over 11 percent in the third quarter, data which analysts believed would give the bank room for a bigger rate hike.

But President Recep Tayyip Erdoğan has made clear his opposition to rate hikes at the current time, telling the bank that rate cuts are needed to further stimulate growth.

Erdoğan has repeatedly stated his belief that high interest rates drive up inflation, flying in the face of economic orthodoxy.