Turkey's central bank hiked interest rates to 50% from 45% on Thursday, surprising the majority of economists who had expected it to hold off until after nationwide local elections on March 31.
MARKET REACTION:
FOREX AND BONDS: The lira rose towards 32 to the dollar , while dollar-denominated Turkish government bonds rallied to stand as much as 2.1 cents on the dollar higher on the day.
STOCKS: The main index of Turkish bank stocks jumped 3.4% (.XBANK) and the broader Istanbul stock market (.XU100) climbed 1.7%.
COMMENT:
LIAM PEACH, EMERGING MARKETS ECONOMIST, CAPITAL ECONOMICS, LONDON:
The central bank's "hawkish communications leave open the possibility of another rate hike in April. With the potential for a faster pace of lira depreciation after the local elections at the end of this month and the recent run of strong inflation figures likely to continue, we now expect at least a 250bp hike next month too."
"The decision to respond so quickly to the recent strong inflation figures and hike rates before the local elections is clearly a very encouraging signal for the policy shift."
STUART COLE, CHIEF ECONOMIST AT EQUITI CAPITAL LONDON:
Near 70% inflation and the falling lira "probably forced the central bank to make this move, even though it said just a couple of months ago that it had finished its tightening cycle."
"Probably also at the back of the central bank's mind were the forthcoming local elections. The lira dropped by about 6%/7% after the presidential elections last year and it was maybe worried about seeing something similar this month, and particularly so given that the lira is already struggling."
JAMES WILSON, EM SOVEREIGN STRATEGIST, ING, LONDON:
"Investors should take the decision as a big positive, convincing them of a genuine shift towards orthodox monetary policy that should be maintained, at least in the near future."
"Sentiment towards Turkish assets should be shored up, after some recent nervousness driven by signs of pressure on the currency and the central bank’s FX reserves."
PETER KISLER, EM PORTFOLIO MANAGER, TRIUM CAPITAL, LONDON:
"It (500 bps rate hike) is a pleasant surprise."
"You can read into this that Simsek and the central bank have the capacity to be more aggressive, upcoming election or not."
"They need to stop the reserves bleed and get inflation down, but this is a good sign."
TIM ASH, SENIOR EM SOVEREIGN STRATEGIST, BLUEBAY ASSET MANAGEMENT, LONDON:
"Hugely positive move by the CBRT (central bank), hiking against expectations by 500 bps to 50%... The narrative had been that the CBRT could not hike before local elections as (President Tayyip) Erdogan had not given them the green light. This move shows that Simsek and the CBRT have been given a strong mandate to do whatever its takes to fight inflation."
"They are proving their independence now. I feel here that we are seeing Erdogan increasingly delegate economic policy, as he thinks increasingly about the succession. For Simsek, Karahan et al this is a huge vote of confidence in them by Erdogan."
BARTOSZ SAWICKI, MARKET ANALYST AT CONOTOXIA FINTECH, LONDON: "The Turkish central bank sent a clear signal it is unwilling to tolerate any substantial deviation from (inflation) forecasts."
PIOTR MATYS, SENIOR FX ANALYST, IN TOUCH CAPITAL MARKETS, LONDON:
"Turkey’s central bank stunned the market by raising the policy rate by 500 bps to 50% against the consensus expectation for stable rates."
"Today’s decision is a very strong signal that Governor Karahan, who took over from Erkan when she unexpectedly resigned, is determined to bring staggeringly high inflation under control and not afraid to act quickly as soon as there is evidence that inflation deviates from official expectations. At least some investors may wonder whether today’s surprising decision was consulted with President Erdogan."
