April 25, 2018 / 11:25 AM / 7 months ago

UPDATE 4-Turkey's central bank hikes top rate by a bigger-than-expected 75 basis points

* Central bank lifts top rate 75 basis points to 13.5 pct

* Analysts’ forecasts had centred on 50 bps hike

* Snap elections called for June 24

* Lira briefly strengthens but then gives up gains (Recasts, adds analyst comment, context)

By Ezgi Erkoyun

ISTANBUL, April 25 (Reuters) - Turkey’s central bank raised its top interest rate more than expected on Wednesday, after the lira hit new lows and President Tayyip Erdogan called snap elections for June, but analysts said it will need to do more to fight inflation and support the currency.

Investors have hammered the lira in recent weeks on concerns about the central bank’s ability to rein in double-digit inflation.

Part of their concern is that Erdogan, a self-described “enemy of interest rates”, has repeatedly called for lower borrowing costs to boost construction and spur economic growth. Investors see that as pressure on the independent central bank.

Erdogan’s shock decision last week to call snap elections for June 24 - bringing the parliamentary and presidential polls forward by more than a year - has been seen by some analysts as an attempt to get the vote out of the way before the economy starts to slow.

The central bank raised the late liquidity window rate - the rate it charges banks to borrow just before the local market closes - by 75 basis points, more than the forecast 50 points.

After the central bank’s rate decision was announced the lira strengthened, only to soon give up those gains, suggesting more tightening might be needed.

“Today’s rate hike is a step in the right direction and shows Erdogan’s decision to call a snap election has placed a heavy premium on the stabilisation of the wilting lira,” said Nicholas Spiro, a partner at Lauressa Advisory in London.

“Yet the fact remains that it will take a sharper and sustained tightening in monetary policy to rein in inflation and restore confidence in the lira. The central bank’s credibility is still badly damaged.”

The lira, one of the worst-performing emerging market currencies so far this year, firmed as far as 4.0307 after the announcement from around 4.1177 beforehand. It was 4.0859 at 1355, slightly weaker on the day.

‘DISAPPOINTMENT’

“Current elevated levels of inflation and inflation expectations continue to pose risks on the pricing behaviour,” the central bank’s monetary policy committee said in a statement.

“Accordingly, the committee decided to implement a measured monetary tightening to support price stability.”

The bank stuck to similar language in its statement as in past releases, reiterating that it would maintain a tight stance until an improvement in the inflation outlook.

“The rate hike decision is a disappointment. A 75 basis point hike was slightly above expectations, but the statement was almost the copy of the previous ones,” said Guillaume Tresca, senior emerging markets strategist at Credit Agricole.

“The bank makes minimal hikes so that they can buy peace and calm the markets but they have not changed the rhetoric. The lira currency will be under pressure very soon. They will have to react again.”

Ten of thirteen economists in a Reuters poll had forecast a late liquidity window rate hike, with four predicting a rise of 50 basis points. Three economists each had foreseen hikes of 25 and 75 basis points. Another three predicted it would leave the rate untouched.

It left its benchmark repo rate at 8 percent, its overnight lending rate at 9.25 percent and overnight borrowing rate at 7.25 percent.

‘UNDER PRESSURE’

The bank’s reluctance to aggressively tighten policy in the face of double-digit inflation has increased concern that it is under pressure from Erdogan, helping send the lira down some 7 percent this year.

But Wednesday’s move is unlikely to remove fundamental pressure on the lira, said Inan Demir, senior emerging markets economist at Nomura International.

“The pressures that the lira is facing are more about overheating and the broader geopolitical risk, and today’s move is not big enough to address those overheating concerns.”

Inflation hit a 14-year high of 12.98 percent in November but has since eased somewhat to 10.23 percent. The central bank’s latest survey showed economists’ inflation expectations for the year-end have worsened in the last month - to 10.07 percent, from 9.49 percent.

It remains well above the bank’s target of 5 percent.

Reporting by Ezgi Erkoyun Additional reporting by Karin Strohecker in London Writing by David Dolan Editing by Hugh Lawson

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