Turkish lira climbs for second day after rate hike, steps on currency swaps

Turkey’s lira gained, strengthening from an all-time low, after the central bank surprised investors and hiked interest rates in a decision on Thursday.

The lira rose 0.9 percent to 7.55 per dollar in late morning trading in Istanbul on Friday.

The embattled currency traded more than 2 percent stronger than a record low of 7.72 per dollar reached in the hours before the central bank’s decision to raise the benchmark rate to 10.25 percent from 8.25 percent. Economists had expected no change.

The central bank hiked rates for the first time in two years despite President Recep Tayyip Erdoğan’s public opposition to higher borrowing costs. Now investors and economists are saying that the bank should convince financial markets it is fully committed to defending the lira and tackling inflation after months of dithering.

The lira also gained after Turkey’s banking supervision agency eased restrictions on local banks engaging in derivative and swap transactions with foreigners in a decision on Friday. The curbs had intensified concerns among investors that the Turkish authorities were compromising free market principles as they fought to keep the lira stable.

Turkey now needs to “ensure full market confidence” Turkish Industry and Business Association (TÜSİAD) Chairman Simone Kaslowski said during a video conference on Thursday, praising the central bank’s decision. Confidence was needed to guarantee the foreign capital inflows required for economic stability, he said.

Consumer price inflation in Turkey stands at 11.8 percent.

Turkey’s central bank had left interest rates on hold since June despite the lira pegging successive record lows against the dollar. Instead, it sought to defend the currency by spending tens of billions of dollars of its foreign exchange reserves, leaving them severely depleted, and tweaking other monetary policy tools.

The central bank has avoided hikes to the benchmark rate – it had slashed it to 8.25 percent from 24 percent since July last year – in support of the government’s pro-growth economic policies, which included flooding the market with cheap loans from state-run banks. The latter measure had boosted demand for imports and widened the current account deficit sharply.