Central Bank of Turkey surprisingly hikes repo rate by 625 bps

The Central Bank of Turkey surprised positively today by hiking the 1-week repo rate by 625 basis points. The median expectation among analysts was a hike of 325 basis points on the back of the CBRT’s announcement 3 September in which it stated that “necessary steps would be taken to secure price stability”. After the announcement expectations were wide as the rage was from unchanged to a hike of 725 bps, noted Nordea Bank in a research report.

The initial reaction from market has been positive for the Turkish lira with USD/TRY down to 6.20 from 6.45, which is around 4 percent stronger. However, the currency pair is still up by over 9 percent since the lira meltdown and nearly 40 percent since the start of 2018.

Even if this is a step in the right direction, the crisis of lira is not over. Credibility of the Turkish central bank has already been damaged and therefore the markets still need to see strong proof that the CBRT can act independently from Erdogan.

“We believe this is shown in the relatively “mild” TRY appreciation, when comparing to a surprisingly high rate hike of 625bp”, stated Nordea Bank.

The Turkish lira might suffer further in the medium-long term as the recent financial turmoil implies that the Turkish economy might face a hard landing. Corporates have greatly borrowed in foreign currencies and with the meltdown of lira year-to-date, there might be an increasing number of corporate defaults and banking sector in problems, added Nordea Bank.