Turkey's central bank has dashed hopes of a return to economic orthodoxy and brought the lira to a new record low after ignoring calls from many investors to raise the main interest rate.
The Turkish lira fell as much as 2.1 percent after a decision was made to keep the one-week reference repo rate and instead optimize the cost of borrowing through an obscure emergency facility.
The currency, which has fallen more than 20 percent against the dollar this year, was close to the symbolic threshold of 8 for money after the decision. It recently traded at TL7.979.
Phoenix Kalen, an emerging markets strategist at Société Générale, said a rate hike would “send a credible signal to the market that they are ready to explicitly raise the benchmark repo rate, that they are willing to accept deteriorating inflation expectations deal and continue the gradual return back to more conventional monetary policy, "she said. "But of course we didn't see that."
"It sends a pretty negative signal to the markets," she added. “Now it seems like they are returning to a strategy of relying on stealth tightening. It's a shift back to this more mysterious, more opaque strategy. The market doesn't like this lack of transparency. "
The central bank has long been under heavy pressure from President Recep Tayyip Erdogan, a staunch opponent of high interest rates, who last year sacked former governor Murat Cetinkaya after a dispute over monetary policy.
However, the bank surprised the markets last month by raising its main repo rate for a week for the first time in two years.
The move boosted sentiment among analysts, most of whom expected policymakers to double in order to stabilize the contested lira and draw back much-needed foreign capital with a second rate hike on Thursday.
Instead, the bank announced that it would keep this main rate on hold and instead raise another rate, the late liquidity window, from 13.25 percent to 14.75 percent.
The bank has used this channel, usually reserved as an emergency facility, in recent months to raise funding costs for the Turkish financial system without announcing a sharp hike in the key rate. Total financing costs have already risen to their highest level since December last year.
Still, the news was received negatively by investors who had hoped last month's decision would mark a turning point. Timothy Ash, an analyst at BlueBay Asset Management, said Turkey's central bank "never seems to learn". He added: "It appears that they will be stress-tested again following this failure to raise the base rate."