Traders at the Istanbul Stock Exchange, Turkey (Photographer: Staton R. Winter/Bloomberg News)

Turkey Markets Rally After Central Bank Simplifies Rates Jumble

(Bloomberg) -- The lira strengthened the most in the world on optimism the central bank’s decision to bring clarity to its interest-rate regime is a sign it may be able to fight the currency’s depreciation without pressure from President Recep Tayyip Erdogan. Stocks and bonds also rallied.

The currency snapped two days of declines as the monetary authority said, starting June, its benchmark would be the one-week repurchase rate, which it hadn’t used as its main funding tool since January 2017. The one-week rate has been set at 16.5 percent, the central bank said in a statement.

“The selloff has tipped the balance in favor of increased central bank independence,” said Per Hammarlund, the chief emerging-market strategist at SEB AB in Stockholm. “A reversal of this stance and increasing political influence over monetary policy is unlikely in the coming months.”

Turkey Markets Rally After Central Bank Simplifies Rates Jumble

The lira gained 2.6 percent to 4.5983 per dollar as of 4:33 p.m. in Istanbul. The yield on 10-year securities fell 57 basis points, the most since 2013, to 14.11 percent, while the Borsa Istanbul 100 Index climbed 3 percent, the steepest increase in more than a month. The volume of trades on Monday may be affected by public holidays in the U.S. and U.K. markets.

Central bank Governor Murat Cetinkaya and Deputy Prime Minister Mehmet Simsek plan to meet with investors in London on Monday and Tuesday following a week in which the lira slumped 4.7 percent, the most since the financial crisis.

Last week’s combination of a rising dollar, double-digit inflation, a widening budget deficit and Erdogan’s plan to have more say in monetary policy spurred a flight from lira assets. Even the central bank’s unscheduled 300-basis point increase to its main rate -- the late-liquidity window -- failed to support the currency for long.

Rates Corridor

“The real test of CBRT independence will come when the lira has strengthened, but inflation and inflation expectations remain high,” Hammarlund said. “For the time being though, the gains in the lira will be sustainable, putting 4.40 within striking distance against the dollar.”

The absence of a single policy rate has long been criticized by investors who say it creates policy uncertainty. The use of a wide interest-rate corridor and multiple interest rates that began under Erdem Basci, Cetinkaya’s predecessor, allowed policy makers to adjust the cost of cash provided to commercial banks daily if they decided it was needed.

Overnight borrowing and overnight lending rates will be set 150 basis points below and above the one-week repo rate, the central bank said in its statement. The overnight borrowing, one-week repurchase and overnight lending rates were at 7.25 percent, 8 percent and 9.25 percent, respectively.

In a separate statement, the bank also said the late-liquidity rate, which was raised to 16.5 percent last week, will be 19.5 percent from June 1.

Read More: Central Bank Shift Shows Crisis Catalyzing Reform

“The simplification move shows the lira crisis has one advantage: Turkey policy makers are finally returning to economic orthodoxy,” said Ziad Daoud, the chief Middle East economist for Bloomberg Economics.

©2018 Bloomberg L.P.