Turkish Lira Soars After Central Bank Hikes Rate By 3%

Update: moments after warning it had held an emergency meeting, the central bank announced it raised the Late Liquidity Window rate to 16.5% from 13.5%


The full statement is below:

The Monetary Policy Committee (the Committee) has decided to set the short term interest rates at the following levels:

a)  Overnight Interest Rates: Marginal Funding Rate has been kept at 9.25 percent and borrowing rate has been kept at 7.25 percent,

b)  One-week repo rate has been kept at 8 percent,

c)   Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate has been kept at 0 percent, while lending rate has been increased from 13.5 percent to 16.5 percent.

Current elevated levels of inflation and inflation expectations continue to pose risks on the pricing behavior. Accordingly, the Committee decided to implement a strong monetary tightening to support price stability.

The Central Bank will continue to use all available instruments in pursuit of the price stability objective. Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement.

It should be emphasized that any new data or information may lead the Committee to revise its stance.

The summary of the Monetary Policy Committee Meeting will be released within five working days.

This is the highest LLW rate since Feb 2009

After the actual rate hike, which however may not be sufficient as many had expected the central bank to raise as high as 20% to stop the attack on the currency, the TRY spiked as low as 4.5817 from 4.9156 earlier, however, the move is starting to reverse.

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After first flash crashing in the night session (a move which the sellside promptly blamed on Japanese retail trader stops getting hit in TRYJPY, which then channeled across USDJPY and then the Nikkei), then slumping to a new all time low just shy of 5.00, moments ago the Turkish Lira soared, with the USDTRY plunging from 4.85 to 4.75 after the Turkish Central Bank said "The Monetary Policy Committee has met to discuss recent developments" in what appears to have been an extraordinary rate meeting.

The statement comes after economy minister Zeybekci said earlier on Wednesday that authorities should exercise authority and should not involve the President in decisions.

The result was an immediate move higher in the TRY.

The Lira then spiked for a second time deputy PM Mehmet Simsek commented on twitter, saying that Turkey is committed to fiscal discipline and that it is time to restore monetary policy credibility.

"It’s high time to restore monetary policy credibility & regain investor confidence. The government is committed to maintaining fiscal discipline & accelerating structural reforms (incl macro prudential measures) to reduce current account deficit & help CB’s disinflation efforts."

He then added that:

"The Central Bank governor & members of the monetary policy committee have my full backing in doing what’s necessary to stem the slide in lira & achieve price stability. None of Turkey’s macroeconomic problems r insurmountable. We’ve fixed problems in the past, we can do it again"

The Lira spiked more after the Simsek tweets:

However, with Turkey now facing a currency crisis, which can quickly translate into a funding, and debt crisis coupled with soaring inflation, the market will be looking for much more than just jawboning. Indeed, as Bloomberg reports, while traders scream for action to stop the free fall, the forward market is still pricing in an assumption that Governor Murat Cetinkaya hasn’t thrown in the towel just yet. The implied yield on three-month forwards points to a 200 basis-point increase in the late liquidity window, the country’s de facto policy rate.

That said, unless Turkey actually does something in the next day or two, today's TRY spike will not last long.