UPDATE - Turkey's Central Bank hikes policy rate to 8 percent

ADDS ANALYST COMMENTS

ANKARA (AA) – Turkey’s Central Bank on Thursday hiked its policy and overnight lending rates after leaving them on hold during its previous meeting, according to the bank.

The bank hiked its policy rate by a 50 basis points to eight percent from 7.5 percent; the overnight lending rate to 8.5 percent from 8.25 percent, while leaving the borrowing rate under which banks lend or deposit money to the Central Bank unchanged at 7.25 percent, it said in a statement.

The monetary policy committee had left all rates on hold in its previous meeting in October following six consecutive months of reductions.

“Recently released data indicates a deceleration in economic activity for the third quarter. Meanwhile, demand from the European Union economies continues to contribute positively to exports,” the bank said.

“With the supportive measures and incentives provided recently, economic activity is expected to recover starting from the final quarter,” it said.

“Since this was a hike above expectations we see it as step which will prevent the Turkish lira from lagging behind other currencies. The Central Bank of Turkey acted proactively in monetary policy responses and in a sense it restored trust,” analyst Enver Erkan from KapitalFX Investment House said.

Erkan added there were also additional measures, such as 50-basis-point reductions in required reserve ratios of the banks, which will provide liquidity to markets and the possibility of repaying rediscount credits exporters used -- traditionally paid in foreign exchange currencies -- in Turkish lira.

Despite the slowdown in aggregate demand that helped in lowering inflation, the bank warned that “exchange rate movements due to recently heightened global uncertainty and volatility pose upside risks on the inflation outlook”.

Future monetary decisions will be closely linked to the course of inflation. Apart from inflation expectations, pricing behaviors and other factors that could have an impact on consumer prices will stay in focus, the statement added.

Erkan said although the Central Bank acted decisively, it may not be enough to calm markets and the tendency of depreciation seen in the Turkish lira.

“Apparently the rate move strengthened the Turkish lira’s resilience but a proactive central bank alone is not sufficient to soothe the markets.

“There are elements over which the central bank has no control, both local and global factors,” he warned, stressing Turkey at least needs to quickly establish a better economic story in coming period.