The Central Bank of the Republic of Turkey (CBRT) also raised its overnight lending rate by 25 basis points to 8.50 percent while the borrowing rate was maintained at 7.25 percent. The lending rate in the central bank's late liquidity window was also raised 25 points to 10.0 percent.
At the same time, the CBRT lowered the reserve requirement for foreign exchange liabilities by 50 basis points for all maturities, freeing up an approximate US$1.5 billion of liquidity to the financial system.
It is the CBRT's first change to its base rate since February 2015 and the first rate hike since a 550 point emergency rate hike in January 2014 after the lira tumbled as investors started to move funds out many emerging market currencies, especially those coined the "Fragile Five:" Turkey, India, Indonesia, South Africa and Brazil.
Many emerging market currencies have witnessed a sell-off since the election of Donald Trump in the U.S. In addition, the lira has been hit as investors are unnerved by the government's purges of state employees and others in the wage of a failed coup and doubts the CBRT would be able to act independently in the face of pressure from politicians to keep rates low.
Prior to the election of Trump on Nov. 8, the CBRT had been slowly lowering the overnight funding rate by 250 basis points since March as inflation had been decelerating amidst the bank's effort to simplify its rate structure.
Despite the central bank's rate hike, the lira dropped further today and was trading at 3.43 to the U.S. dollar, down 7.9 percent since the day prior to the U.S. Presidential election and down 14.7 percent since the start of this year.
Turkey's headline inflation rate eased to 7.16 percent in October from 7.28 percent in September and the CBRT said economic activity in the third quarter had decelerated but it expects activity to recover from the final quarter due to the government's supportive measures and incentives.
As in recent months, the CBRT said it was closely monitoring inflation and expectations and its cautious monetary policy stance would be maintained while future decisions would be conditional on the outlook for inflation.
The Central Bank of Turkey issued the following statement:
"Participating Committee Members
Murat Çetinkaya (Governor), Ahmet Faruk Aysan, Erkan Kilimci, Emrah Şener, Murat Uysal, Abdullah Yavaş.
The Monetary Policy Committee (the Committee) has decided to set the short term interest rates at the following levels:
a) Overnight Interest Rates: Marginal Funding Rate has been increased from 8.25 percent to 8.5 percent, and borrowing rate has been kept at 7.25 percent,
b) One-week repo rate has been increased from 7.5 percent to 8 percent,
c) Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate has been kept at 0 percent, and lending rate has been increased from 9.75 percent to 10 percent.
Recently released data indicate a deceleration in the economic activity for the third quarter. Meanwhile, demand from the European Union economies continues to contribute positively to exports. With the supportive measures and incentives provided recently, economic activity is expected to recover starting from the final quarter. The Committee assesses that the implementation of the structural reforms would contribute to the potential growth significantly.
The slowdown in aggregate demand contributes to the fall in inflation. Yet, exchange rate movements due to recently heightened global uncertainty and volatility pose upside risks on the inflation outlook. The Committee decided to implement monetary tightening to contain adverse impact of these developments on expectations and the pricing behavior.
Future monetary policy decisions will be conditional on the inflation outlook. Inflation expectations, pricing behavior and other factors affecting inflation will be closely monitored and the cautious monetary policy stance will be maintained.
It should be emphasized that any new data or information may lead the Committee to revise its stance.
The summary of the Monetary Policy Committee Meeting will be released within five working days."