Lira Soars After Massive Rate Hike Of 625bps To 24%

President Erdogan will be very unhappy.

Hours after President Erodgan slammed the central bank for high rates and runaway inflation, the central bank defied the president and surprised markets by hiking far more than the 325bps expected, raising the one week repo rate by 625bps to 24% from 17.75%, some 3% above the expected 21% and sending the Lira surging as much as 5% in the process.

To justify its decision, the central bank said that the decelaration in domestic demand has became more visible, and said that "despite the milder impact of demand conditions on inflation, elevated levels of inflation and inflation expectations continue to pose risks on the pricing behavior."

Following today's hike, this is what interest rates look like around the world:

  • Argentina: 60%
  • Turkey: 24%
  • Venezuela: 20.5%
  • Iran: 18%
  • Egypt: 16.7%
  • Nigeria: 14%
  • Mexico: 7.75%
  • Pakistan: 7.5%
  • Russia: 7.25%
  • Brazil: 6.5%
  • India: 6.5%
  • Indonesia: 5.5%
  • China: 4.35%
  • Saudi: 2.5%
  • US: 2%
  • Australia: 1.5%
  • Canada: 1.5%
  • UK: 0.75%
  • Euro area: 0%
  • Japan: -0.1%

Here is the CBRT press release:

The Monetary Policy Committee (the Committee) has decided to increase the policy rate (one week repo auction rate) from 17.75 percent to 24 percent.

Recently released data indicate a more significant rebalancing trend in the economic activity. External demand maintains its strength, while slowdown in domestic demand accelerates.

Recent developments regarding the inflation outlook point to significant risks to price stability. Price increases have shown a generalized pattern across subsectors, reflecting the movements in exchange rates. Deterioration in the pricing behavior continues to pose upside risks on the inflation outlook, despite weaker domestic demand conditions. Accordingly, the Committee has 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. Inflation expectations, pricing behavior, lagged impact of recent monetary policy decisions, contribution of fiscal policy to rebalancing process, and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered.

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.

In a separate release on lira liquidity management, the CBRT said that Central Bank funding, which is currently provided through overnight lending, "will be provided via one-week repo auctions starting from September 14, 2018." adding that the one-week transition period has been envisaged for providing all of the funding via one-week auctions.

In kneejerk response to the far bigger than expected rate hike, the Turkish lira surged as much as 5%, dropping from 6.40 vs the dollar to as high as 6.00 before reversing some gains.