ISTANBUL: Turkey’s central bank raised its overnight lending rate for a second straight month Tuesday in a bid to prevent a slide in the lira as worries about a reduction in U.S. stimulus hammer emerging market currencies.
The bank hiked its lending rate by 50 basis points to 7.75 percent, but kept its one-week repo policy rate at 4.50 percent and its overnight borrowing rate at 3.50 percent.
It said it could take more steps if needed and would stick to its current policy stance until inflation – which hit 9 percent in July – fell toward its medium-term target of 5 percent.
The move defied consensus expectations in a Reuters poll, with 13 out of 15 economists forecasting all rates would remain on hold as the monetary policy committee remained nervous about actions that might stifle fragile growth.
Only two had forecast a 50 basis-point hike in the overnight lending rate, largely due to higher U.S. Treasury yields, which have hit the lira and other emerging market currencies.
The lira firmed to 1.9490 against the dollar after the announcement. The yield on the 10-year bond fell to 9.14 percent, from 9.25 beforehand.
“The central bank is trying still to keep the lira’s head below the parapet, keep lira depreciation in the middle of the pack of emerging markets forex, while still focused on the uncertain outlook for growth,” said Standard Bank economist Timothy Ash.
Growing expectations that the U.S. Federal Reserve may soon start tapering its stimulus program has hit appetite for emerging market assets, and Turkey’s gaping current account deficit leaves it particularly vulnerable.
Turkey is heavily dependent on foreign inflows to finance the gap, which at around 7.1 percent of its output is its main economic weakness.
Investors had been eager for signs that the central bank was serious about tightening liquidity to prevent capital outflows and help finance the large external funding needs.
The bank said the current account deficit was gradually improving.
Markets have zeroed in on the currencies of countries whose external funding gaps make them vulnerable to any pullback in global capital flows.
This, along with slowing growth and rising inflation at home, has meant countries such as India, Indonesia and Brazil have struggled to stem the rout in their currencies, which have crashed to record or multi-year lows.
The rupee, South African rand and Brazilian real have lost 14-17 percent against the dollar this year.
The lira is down by a relatively small 8.7 percent and has been comparatively stable in recent weeks, staying well off the record lows hit in July.
Analysts attribute this to the decisive policy tightening stance adopted by the central bank at its meeting last month, when the lira firmed to around 1.90 to the dollar, but warn any slippage could put it under further pressure.