Lira fails to rally after Turkey rate hike

The Turkish central bank on Tuesday hiked its main interest rate by 75 basis points in a bid to boost the ailing lira but failed to impress markets looking for even sharper action.

The monetary policy committee of the bank said the overnight lending rate was being lifted to 9.25 percent from 8.5 percent, the second rate hike since November last year.

But the committee kept its one-week repurchasing (repo) rate unchanged at 8.0 percent and the overnight borrowing rate was kept at 7.25 percent.

But with markets hoping for even more and taken aback by the absence of any move in the repo rate, the lira initially lost 1.95 percent in value against the dollar after the announcement.

It later stabilised to trade at 3.77 to the greenback, a loss in value of 0.5 percent.

Some economists expected interest rates to be increased by 100 basis points -- or a full percentage point -- after the lira lost seven percent of its value against the dollar in the first four weeks of 2017 alone.

The lira has lost a quarter in value against the dollar over the last year, alarming the government ahead of a referendum expected in April on changing the constitution to give President Recep Tayyip Erdogan more power.

- 'Tighten further' -

The bank said in a statement that domestic demand in Turkey was on a "weaker" course, warning a "significant rise in inflation" was expected in the short term.

The bank pointed to food price volatility as one of the main factors that could drive up prices after inflation was reported at 8.5 percent in December, compared with 7.0 percent the previous month.

"The committee decided to strengthen the monetary tightening in order to contain the deterioration in the inflation outlook," it said.

Economists said the decision showed the bank was not convinced by the need for radical action to halt the plunge in value of the lira.

"We feel the bank still thinks that this Turkish lira depreciation will be a temporary one and its impact on inflation will be temporary," said Ozgur Altug, chief economist at BGC partners in Istanbul.

Deputy Prime Minister Mehmet Simsek said on Twitter the move indicated the bank was tightening monetary policy and willing to "tighten further", adding: "Price stability remains the top priority."

- 'First priority economy' -

The ruling Justice and Development Party (AKP) has dominated Turkish politics since winning its first majority in 2002 and the economy's strong performance and investment in public infrastructure has been a pillar of its success.

Hurriyet daily's well-connected columnist Abdulkadir Selvi said the economy would be the first priority on the government's agenda as the country headed to the referendum.

"The aim of the government is to breathe life into the economy before the referendum to calm the public," Selvi wrote Tuesday.

The lira's performance has been the worst of any emerging markets currency with the country hit by multiple challenges in the last 18 months, including terror attacks raising fears over security and political instability.

Since the failed coup on July 15 which tried to overthrow Erdogan, the government has launched widescale purges, detaining, sacking or suspending thousands of people in the public sector.

Ankara insists it is dealing with an extraordinary threat but critics say Erdogan's opponents are also being targeted.

The fragile economy has also been hit by a series of poor data including last week's unemployment rate which rose to 11.8 percent in October, the highest in more than six years.