ISTANBUL - Turkey's central bank said on Thursday that it suspended one-week repo auctions and hiked its overnight lending rate to 46%, in a move that economists say amounts to a tighter policy stance.

Traders and analysts said overnight market interest rates could be 350 to 400 basis points higher after the move, as the central bank will fund the market from rates higher than its current policy rate of 42.5%.

The overnight lending rate was raised by 200 basis points from 44% in an interim monetary policy committee meeting, as the central bank convened on Thursday to discuss recent developments that may pose risks to the inflation outlook.

"This regulation provides flexibility to increase overnight market interest rates, which have recently been 42%, to 46%. Instead of losing reserves, it is an important and correct step to show that your hands are not tied by making this decision," Economist Hakan Kara said in a post on X.

"After this decision, the expectation of a rate cut in April will probably disappear," Kara added.

The lira currency and stocks sold off aggressively on Wednesday after authorities detained Istanbul mayor Ekrem Imamoglu, the main political challenger to President Tayyip Erdogan.

In a statement, the central bank said it kept its policy rate and overnight borrowing rate constant at 42.5% and 41% respectively. The bank also said it will pause one-week repo auctions separately.

The Turkish lira strengthened to 37.5 against the U.S. dollar after the decision from 37.99 immediately beforehand. The currency tumbled on Wednesday to a record low of 42 per dollar before recouping most of the day's losses.

Foreign exchange and lira liquidity measures have been introduced to limit market volatility and additional actions could be taken to maintain the functioning of financial markets if necessary, the bank said.

"Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen," the bank added.

The central bank's next rate-setting meeting is scheduled to take place on April 17.

(Reporting by Ezgi Erkoyun and Nevzat Devranoglu Editing by Jonathan Spicer, Frances Kerry, William Maclean)


Reuters