Lira Tumbles After Central Bank Defies Rate-Hike Expectations

The lira sank to a record low after Turkeys central bank unexpectedly held back from raising its key interest rate.

Traders had been holding out for a fresh increase on Thursday after policy makers hiked rates at their previous meeting. The currencys slump of more than 2% -- the biggest decline in emerging markets -- underscored their disappointment as the lira weakened toward 8 per dollar.

The Monetary Policy Committee left its key one-week repo rate at 10.25%, a decision forecast by just two of 27 respondents in a Bloomberg survey. At the same time, it raised the upper bound of its interest-rate corridor to 14.75% from 13.25% and doubled the gap with the central banks overnight lending rate to 300 basis points.

Bitesize Podcast: Lira Vulnerable After Turkeys Rate Decision

Widening the rates corridor is “a smoke and mirrors trick that is worse than useless if the central bank wants to have an ounce of inflation fighting credibility,” said Nigel Rendell, an analyst at Medley Global Advisors in London.

The decision removes a tailwind that had helped the currency rise in recent days amid jittery global risk sentiment in the run-up to U.S. elections. The lira had gained about 0.4% ahead of the meeting on Thursday, buoyed by expectations the Turkish central bank would lift the one-week repo rate for a second time in a row.

The benchmark Borsa Istanbul Banks Index fell as much as 3.7%. Yield spreads on Turkish sovereign bonds widened 4 basis points relative to U.S. Treasuries. The lira was trading down 1.5% at 7.9261 as of 3:24 p.m. in Istanbul.

Fresh record lows are “likely” in the coming days following the central banks surprise decision today and upcoming uncertainty around the U.S. presidential vote, said Onur Ilgen, an Istanbul-based treasury manager at MUFG Bank Turkey AS.

— With assistance by Filipe Pacheco, and Justin Carrigan

(Updates prices, adds analyst quote in seventh paragraph.)