Lira Shoots Higher against Pound after Turkish Central Bank Delivers Show-stopping Interest Rate Rise

- Central bank of Turkey raises rates by 6.25% to save currency. 

- Turkish Lira rises by 6.0% against main rivals in show of relief.

- Suggests Erdogan may have caved to calls for CBRT independence.

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The Turkish Lira shot higher Thursday after the Central Bank of Turkey (CBRT) raised interest rates despite opposition from President Recep Tayyip Erdoğan, whose influence over the institution has contributed to the nation's 2018 currency crisis.

Turkey's central bank raised its rate by 6.25%, taking the base lending rate to 24.0%, at its meeting on Thursday. The move was much bigger than the 3.25% increase anticipated by the market.

As a result the Turkish Lira rose rapidly after the announcement, with USD/TRY falling by -5.95% to trade at 6.01, down from 6.39 just before the renouncement. Although it quickly pared some of its loss, rising back to 6.20.

Above: USD/TRY rate shown at five minute intervals.

The Pound-to-Lira rate fell by an even greater -6.1% to just 7.85, its lowest since late August, although the move was quickly pared back. GBP/TRY was trading at 8.11 an hour after the announcement.

Above: Pound-to-Lira rate shown at give minute intervals.

The rate hike came as a surprise to some investors as it followed a statement only a few hours earlier from President Erdogan in which he said he was opposed high interest rates, describing them as a "tool of exploitation."

The CBRT appears to have disregarded Erdogan's comments, suggesting either the President's interference in bank policy matters is lessening or that the institution's autonomy is greater than previously thought.

In its accompanying statement the CBRT said it was prepared to maintain high interest rates and stood ready to use further monetary tightening - or hike rates further - if needed. The Bank also said it planned to keep rates high until the inflation outlook moderated.

Consensus prior to the announcement was that the bank would have to raise interest rates by at least 3.25% to stem the depreciation in the Lira and prevent inflation from spiralling out of control. The larger-than-expected hike, however, suggests this will buy stability for longer and could be a game-changing moment for the Lira.

Although the CBRT showed independence in its decision on Thursday, analysts are still concerned it could be coerced by Erdogan in the future and will require more confidence it is willing to do the necessary thing if required again in the future to shrug off accusations it is Erdogan's handmaid.

"This is certainly enough to calm some nerves faced by the lira for the time being. The bigger question now will be can the central bank maintain its independence in light of Erdogan's comments earlier in the day?" Says Justin Low, and analyst at liveforex.

Thursday's move comes after a severe depreciation in the Lira, which has lost 47% of its value in 2018, due to a mixture of unchecked inflation, US trade sanctions, a rising current account deficit - which increases the country's dependence on external lenders - and a general shift in foreign capital out of emerging market assets.

The CBRT has been slow in acting to counter the fall in the Lira due to concerns that it might have been unduly influenced by President Erdogan, who is an avowed enemy of high interest rates. Interest rate rises are the primary tool central banks use to combat inflation and, or, support their currencies.

The government also introduced other measures to reduce pressure to raise rates. It raised the tax on US Dollar deposits while lowering its levy on Turkish Lira bank deposits, and has also forced the repatriation of 80% of exporter's outstanding receivables to increase demand for the Lira, but these were not enough to stem the sell-off and avoid another rate hike.

Thursday's move, however, is expected to be a more sustainable solution.

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