(Bloomberg) -- Any lingering concern among global investors that Turkey may go back on its commitment to pursue orthodox policies seemed to have been scotched by Thursday’s interest-rate hike.

The country’s assets rallied after the 500 basis-point increase that most economists and money managers had not forecast though they believed would be the correct decision given elevated inflation and deeply negative real yields. The lira appreciated as much as 1.6% against the US dollar for the best performance among emerging-market peers. Bonds and bank stocks also gained, while credit default swaps dropped the most this year. 

Read more: Turkey Blindsides Market With Rate Hike to Lift Lira Before Vote

After years following a monetary policy that investors considered to be too loose, Turkey made a U-turn last year under President Recep Tayyip Erdogan’s third term. A rate-hike campaign since then has taken combined increases through Thursday to 41.5 percentage points, with a peak in inflation seen this year. But just when investors returned to Turkey to bet on the turnaround, the central bank went through a turbulence that saw the departure of its governor and raised questions about policy continuity.

The latest decision is helping to restore the bullish narrative.

“It’s a big move, and it will lead to a stabilization in lira exchange rates over the remainder of the year.” said Peter Kinsella, the global head of FX strategy at Union Bancaire Privee in London. “It also shows the market that it can still move following the departure of the former governor and that the senior authorities are still wedded to an orthodox policy approach.”

Gordon Bowers, analyst at Columbia Threadneedle Investments

“Now assuming CBRT Governor survives in his post until Saturday morning, I think foreign portfolio flows will soon be returning to Turkey”

Guillaume Tresca, global EM strategist at Generali Investments

“This move confirms the growing independence of the CBRT, especially ahead of the elections. It will mean that the MPC under the new Governor is ready to take the needed actions and it seems he has room to manoeuvre. It has been the main fear of investors when Mehmet Simsek came to back as a Ministry and the MPC was appointed”

Piotr Matys, senior FX analyst at InTouch Capital Markets

“Given that the lira has been under persistent selling pressure ahead of the local elections scheduled for March 31, at least some investors may interpret today’s decision as an emergency rate hike to keep the Turkish currency stable in the coming weeks”

Kieran Curtis, investment director at Abrdn

“I am quite surprised that the political economy allowed it. It’s clearly the correct decision from a policy perspective with inflation going up again recently in response to higher wages and also further reserve losses recently.”

Batuhan Ozsahin, chief investment officer at Ata Investment

“Pretty hawkish. Highly positive”

Tufan Comert, director of global markets strategy at BBVA

“This would help negative expectations to dissipate regarding Mehmet Simsek’s position after the elections. It will clearly ease the burden on the CBRT’s shoulders”

 

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