Lira Slumps as Turkey Rate Hike Falls Short of Expectations

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(Bloomberg) -- Turkey’s lira headed for its biggest loss against the dollar in more than a month and bonds fell after the central bank raised a key rate less than expected.

The lira fell as much as 2.1 percent and the yield on the nation’s 10-year bond yield headed for a two-week high after policy makers raised the rate on the so-called late liquidity window by 50 basis points, compared with expectations for a 100-basis point increase. Policy makers left all other rates unchanged.

Even with the increase, the 12.75 percent rate on the late-liquidity window trails inflation that is running at almost 13 percent, disappointing investors who had hoped the central bank would take more aggressive action to tame consumer prices. The lira fell to a record low last month, with Turkish assets vulnerable to capital flight as the Federal Reserve tightens policy.

“The central bank has missed an opportunity to restore a degree of credibility,” Lorenzo Gallenga, the Milan-based head of global macro and emerging markets at Quaestio Capital Management SpA, said by email. “I suspect they lowered their guard given the lira had been recovering in recent days,” said Gallenga, adding he has no exposure to Turkish assets at the moment.

The lira traded 1.8 percent lower at 3.8788 per dollar, after touching the lowest in more than a week and trimming an advance this month to about 1 percent. There’s a risk it could reach 4 per dollar into the year-end, Gallenga said. The yield on 10-year government bonds rose 18 basis points to 12.38 percent.

Here is what some analysts said about the rate decision and the lira:

Nomura International Plc (strategist Henrik Gullberg)

  • “Not sure how they rationalize hiking 50 basis points. It does not return real rates to positive, and opens the central bank up for critique domestically”
  • Says a move to 3.90-3.9250 per dollar “seems certain,” but doesn’t think a sell-off will extend further than that, citing positioning and base effects on inflation that “will translate into lower year-on-year inflation in early January, meaning real rates will increase somewhat”
  • “But this is no circuit breaker. If they had hiked by 150 basis points the markets would have gone long the lira, taking dollar-lira to 3.75-3.7750, thus adding to the base-effects driven disinflation narrative over the next few months”

BlueBay Asset Management LLP (senior emerging-market strategist Timothy Ash)

  • “Turkish markets have been behaving reasonably well in recent weeks, despite really tricky political, geopolitical newsflow, because I think the market assumed the central bank would do the decent thing and hike, meaningfully. This muted hike leaves Turkish markets exposed again”

Turk Ekonomi Bankasi AS (strategist Erkin Isik)

  • “They continue to say that they would deliver further tightening, if needed, so this leaves the door open for more hikes in the next monetary policy committee meeting on 18 January”
  • He expects policy makers will drive the weighted cost of funding up by 50 basis points on Friday

Rabobank (strategist Piotr Matys)

  • “Today’s meeting could have been an opportunity to discourage speculators from betting against the lira by raising rates decisively. Instead, the 50bps move may reignite speculation that the central bank has very limited room to raise rates, which in turn leaves the lira exposed to another round of speculative attack”

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