Turkish Lira on a Tear

The lira surged the most in almost three years after the central bank sought to bring clarity to an interest rate regime that had been muddied by a preponderance of benchmarks. Stocks and bonds also rallied.

The Turkish currency snapped two days of declines as the monetary authority said it would start using the one-week repo, which hadn’t been used as its main funding tool since January 2017, as its policy rate starting June. The one-week rate has been set at 16.5%, the central bank said in a statement, Bloomberg reported.

“The simplification move shows the lira crisis has one advantage: Turkey policy makers are finally returning to economic orthodoxy,” said Ziad Daoud, chief Middle East economist for Bloomberg Economics. “Opaque monetary policy framework, multiple policy rates, changes of CBRT cost of funding between MPC meetings and flawed theories on how high interest rates cause high inflation are a thing of the past, hopefully.”

The lira gained 3.3%, the most since November 2015, to 4.563 per dollar. The yield on 10-year securities fell 50 basis points to 14.18%, while the Borsa Istanbul 100 Index climbed 2.9%.

Central Bank Governor Murat Cetinkaya and Deputy Prime Minister Mehmet Simsek plan to meet with investors in London on Monday and Tuesday following a week in which the lira slumped 4.7%, the most since the financial crisis.

Last week’s combination of a rising dollar, concern over the nation’s double-digit inflation and widening budget deficit, and President Recep Tayyip Erdogan’s plan to have more say in monetary policy spurred a flight from lira assets. Even the central bank’s unscheduled 300-basis point increase to its main rate—the late-liquidity window—failed to support the currency for long.

The absence of a single policy rate has long been criticized by investors who say it creates policy uncertainty. The use of a wide interest rate corridor and multiple interest rates that began under Erdem Basci, Cetinkaya’s predecessor, allowed policy makers to adjust the cost of cash provided to commercial banks daily if they decided it was needed.

Overnight borrowing and overnight lending rates will be set 150 basis points below and above the one-week repo rate, the central bank said in its statement. The overnight borrowing, one-week repurchase and overnight lending rates were at 7.25%, 8% and 9.25%, respectively.

In a separate statement, the bank also said the late liquidity rate, which was raised to 16.5% last week, will be 19.5% from June 1.