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Lira, Turkish Equities Rally on Sizeable Rate Hike

TURKEY
  • The magnitude of today's hike was well outside of expectations. Sell-side consensus was firmly for a 250bp rate increase. Even among those who noted outside risk of a larger hike, an increase of such size was not considered. They last hiked by 750bps in a market-steadying measure after the Presidential elections in May.
  • USDTRY dropped almost 2% on the decision. The pair broke below 27.00 and is now at levels not seen in over a month. The Borsa Istanbul index rallied on the decision while yields on Turkey’s USD bonds have fallen 12-18bps across the curve.
  • The decision appears to have been based on the bank's confidence that recent adjustments to macroprudential measures are sufficient to deal with recent lira liquidity issues, which had hampered transmission. As such, these regulatory tweaks helped facilitate the higher-than-expected rate hike today: “recent regulations targeting a rising share of Turkish lira deposits will strengthen the monetary transmission mechanism.”
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