Lira Plunges After Turkish Central Bank Unexpectedly Holds Rates

The Turkish lira plunged and bonds fell as investors said they’d lost faith in the central bank’s credibility after it unexpectedly left interest rates unchanged.

The currency weakened as much as 4.2 percent to approach a record low and the yield on the nation’s 10-year bonds jumped 132 basis points to a one-week high. Most analysts in a Bloomberg survey had forecast that the central bank would raise the repo rate by at least 100 basis points after inflation accelerated to more than three times the bank’s official target in June.

Investors say higher rates are needed to cool the economy and many expected policy makers to deliver a increase and help put to rest speculation that President Recep Tayyip Erdogan’s opinions are the main factor in central bank decisions. Erdogan, who’s been a longtime advocate of alternative economic theories that favor lower rates, assumed more control of policy after constitutional changes empowering his office went into effect on June 24.

The president’s interference in central bank policy has compounded the lira’s 22 percent slide this year, the biggest drop in emerging markets after the Argentine peso.

“This decision essentially confirms the markets’ worst fears,” said Inan Demir, an economist at Nomura International in London. “Unless this policy mistake is corrected by an emergency rate hike very soon, the markets’ fears will translate into further substantial lira weakness.”

The lira trimmed was trading 2.8 percent lower at 4.872 per dollar as of 3:07 p.m. in Istanbul. The yield on the nation’s 10-year bond pared an earlier increase to 117 basis points.

Here’s a selection of comments from analysts:

BlueBay Asset Management

  • It’s “remarkable that they chose not to hike,” said BlueBay Asset Management strategist Timothy Ash. “Despite all the warm words from Albayrak this week, this was a mistake by the CBRT.”
  • “The market likely will test the CBRT again. Strange that Albayrak said that the CBRT would not fight the market – but the CBRT seems to be doing exactly that”

Old Mutual Global Investors:

  • “Well, this is obviously a disappointing decision that shows the CBRT’s priority doesn’t seem to be inflation targeting anymore,” said Delphine Arrighi, a portfolio manager at Old Mutual Global Investors. “I would not be surprised to see USDTRY flirting with 5.”


  • “This was a major policy mistake from the Turks and a missed opportunity to build on the credibility they gained with +500bp of policy tightening delivered during Q2,” said Paul Greer, a London-based emerging market money manager
  • “The markets had expected a +100bp rate hike and this was viewed as the absolute minimum required to appease continued investor fears about the country’s outlook.”
  • ““Following today’s developments, we remain cautious on the Lira and Turkish local currency bonds and expect further additional risk premium to now be priced into the market.”

Capital Economics

  • “As we’ve argued numerous times, pursuing looser economic policy will simply exacerbate the vulnerabilities in Turkey’s economy and, ironically, increase the market pressure on the Turkish central bank to take emergency action,” said Jason Tuvey, a senior emerging market economist
  • “More than anything, though, the decision to leave rates on hold provides the first evidence that President Recep Tayyip Erdogan holds increasing sway over Turkish monetary policy

— With assistance by Onur Ant

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