Lira Tumbles After Central Bank Defies Rate-Hike Bets

The lira sank to a record low, trading near 8 per dollar, after Turkey’s central bank unexpectedly held back from raising its key interest rate. Sovereign bonds and bank stocks also fell.

The currency depreciated as much as 2.1%, about three times more than any other emerging-market counterpart, to trade at an unprecedented 7.9797 per dollar. It was at 7.9605 as of 2:41 p.m. in Istanbul.

The lira gained about 0.4% ahead of the meeting on expectations that 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 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 doubling the gap with the central bank’s overnight lending rate to 300 basis points.

Turkey Expands Rate Corridor But Unexpectedly Holds Benchmark

The lira’s slump shows investors’ disappointment as it has “fallen like a stone,” said Nigel Rendell, an analyst at Medley Global Advisors in London. As far as the market is concerned, 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,” he said.