The Turkish central bank on Tuesday hiked its headline interest rate by 75 basis points in a bid to boost the ailing lira but failed to impress markets looking for even sharper action.
The monetary policy committee of the bank said the overnight lending rate was being lifted to 9.25 percent from 8.5 percent, coming on the heels of a rate hike in November last year. But the committee kept its one-week repurchasing (repo) rate unchanged at 8.0 percent and the overnight borrowing rate was kept at 7.25 percent.
But with markets hoping for even more and taken aback by the absence of any move in the repo rate, the lira initially lost 1.95 percent in value against the dollar after the announcement.
It later stabilised to trade at 3.76 to the greenback, a loss in value of 0.3 percent on the day but well short of the rally many had hoped for after the meeting.
Some economists expected interest rates to be increased by 100 basis points - or a full percentage point - after the lira lost seven percent of its value against the dollar in the first four weeks of 2017 alone.
The lira's recent performance has been the worst of any emerging markets currency, alarming the government ahead of a referendum expected in April on changing the constitution to give President Recep Tayyip Erdogan more power.
The bank opened the door to further hikes, warning in a statement that a "significant rise in inflation" was expected in the short term.
Inflation was reported at 8.5 percent in December, compared with 7.0 percent the previous month.
"The committee decided to strengthen the monetary tightening in order to contain the deterioration in the inflation outlook," it said. It added: "If needed, further monetary tightening will be delivered."
Economists said the decision showed the bank was not convinced by the need for radical rate hikes to halt the plunge in value of the lira and would prefer employ other tactics.
The lira has since January 10 pared losses after the bank took measures to increase the amount of liquidity in the market, boosting demand for the lira.
The decision showed the bank was not ready to deliver "decisive, orthodox hikes even so soon after (the lira) hit all-time lows in a move that seemed on the verge of turning disorderly", Inan Demir of Normura International said in a note.
"We feel the bank still thinks that this Turkish lira depreciation will be a temporary one and its impact on inflation will be temporary," said Ozgur Altug, chief economist at BGC partners in Istanbul.
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