Turkey’s rate hike fails to convince markets

The Turkish central bank’s decision to opt for a smaller hike in its late liquidity rate today than markets had anticipated seems to reflect political pressure not to tighten policy substantially. The lira has already fallen by 1% against the dollar since the announcement. With inflation set to decline in the coming months, our base case is that the central bank won’t tighten policy further. But if the lira sell-off gathers pace in the coming weeks, another hike would quickly come back onto the agenda.