Turkey‘s lira has charged higher against the dollar as investors cheered the central bank’s surprise move to raise its policy rate, while emerging market stocks dropped to two-month lows.
After hitting a series of record lows, the lira climbed 1% as the central bank said a fast recovery from the initial coronavirus pandemic shock sent inflation higher than expected, prompting it to hike interest rates by 200 basis points after nearly a year of aggressive rate cuts.
Economists on Thursday were expecting back-door tightening measures while rates stay on hold.
“Massive surprise, and positive. Suggests the (central bank) listened to the market and decided they had to move to avoid a disorderly devaluation and potential balance of payments crisis,” said Tim Ash at BlueBay Asset Management.
“They are not out of the woods yet, but they have given themselves a fighting chance.”
The lira has lost over 20% versus the dollar this year, making it one of the worst performing currencies due to worries about Turkey‘s depleted forex reserves and sharply negative real interest rates.
The lira was also supported by easing tensions over sanctions from the European Union after Ankara agreed to talks with Greece over maritime claims, although a date for discussions had not been decided yet.
Stocks in Istanbul climbed about 1%.