People stand behind a Turkish national flag (Photographer: Kostas Tsironis/Bloomberg)

Turkey Raises Repo Rate to 16.5 Percent in Simplification

(Bloomberg) -- Turkey’s central bank has decided to more than double its one-week repo rate to 16.5 percent from June 1, equalizing that rate with the current main funding rate and setting it as the new benchmark, it said in a statement on its website.

That will bring monetary policy simplification to a completion after about two years of planning. The changes are aimed at moving to a more predictable single-rate framework, abandoning the current set-up that prioritized flexibility and relied on multiple instruments. The lira surged, gaining the most in almost a decade on a closing basis.

The bank also said its other rates will rise in line with the shift in the one-week repo, resulting in a symmetrical corridor of interest rates. By doing that, it augmented efforts to stem a slide in the lira, which had included raising interest rates at an emergency meeting last week.

The currency, which has been under pressure amid concerns that Turkey’s economy is overheating and that the central bank was unwilling to act against political pressure to keep rates low, rebounded on the news. It was trading 3 percent higher at 4.5765 per dollar at 1:30 p.m. in Istanbul.

For more on the last week’s meeting, read: How Markets Won: Erdogan Concedes a Hated Rate Hike to Save Lira

Rates Higher

The transition from a “complicated monetary policy" that included inactive interest rates in the funding mechanism to a “more understandable policy" is highly positive for foreign investors, Garanti Securities chief economist Nihan Ziya-Erdem said in a report after the decision.

The overnight lending and borrowing rates will be set at 18 percent and 15 percent, up from 9.25 percent and 7.25 percent currently, according to the bank. The late liquidity window rate will also rise 300 basis points to 19.5 percent once the operational shift to the new framework comes to an end on June 7, it said.

The one-week repo rate is currently at 8 percent. It was previously the central bank’s main funding tool, but hasn’t been used since January 2017. The late liquidity lending rate, which the bank was deploying instead, was designed as an emergency funding rate for banks that had mismanaged daily cash needs. It should return to that function after the switch.

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