Turkish lira hit 9.38 to euro on Friday

Turkey’s central bank bucked expectations for a big interest rate hike on Thursday and sent the lira plunging to a record low or near 8 to the dollar, 9.38 to the euro, and 10.39 to the British pound.

The central bank held its policy rate at 10.25 per cent, saying it had already made progress in containing inflation.

The bank, which also surprised last month when it hiked rates, said it would continue with liquidity measures to tighten money supply. It raised the uppermost rate in its corridor, the late liquidity window (LLW), to 14.75 per cent from 13.25 per cent. A Reuters poll of 17 economists had expected the bank to raise its key one-week repo rate by 175 basis points to address Turkey’s weak currency and double-digit inflation. Forecasts ranged from hikes of 100 to 300 bps.

The decision to leave the rate unchanged sent the lira down more than 2 per cent to near 8 versus the dollar and prompted economists to question the central bank’s commitment to lowering inflation and its independence from the government.

The key policy rate remains below annual consumer price inflation, which stood at 11.75 per cent in September, leaving real rates negative for lira depositors.

Turkey’s central bankers had surprised markets with a 200 basis point rate hike in September, the first monetary tightening in two years as it sought to rein in inflation.

The lira touched a record low of 7.9845 against the dollar.

It is down 25% this year in a selloff prompted by concerns about high inflation and the central bank’s badly depleted FX reserves, and geopolitical worries including the prospect of trickier U.S. ties under a possible Joe Biden White House.

Last month’s hike in the policy rate reversed a nearly year-long easing cycle in which it fell rapidly from 24%, where it was set in the face of a 2018 currency crisis.

Turkey’s economy contracted 10 per cent in the second quarter because of the coronavirus pandemic and measures to combat it. Tensions in the Eastern Mediterranean and in the Nagorno-Karabakh conflict are also clouding the outlook.