İmamoğlu's detention shakes markets: Central Bank intervenes with interest rate hike

Following the detention of Istanbul Metropolitan Municipality (İBB) Mayor Ekrem İmamoğlu on Wednesday, March 19, the sharp depreciation of the Turkish Lira caused significant volatility in the markets.

With the dollar reaching the 41 TL level and the euro hitting 45 TL, the Turkish Lira reached a historic breaking point. Additionally, gram gold climbed to the 4,000 TL level. With these developments, the Central Bank decided to intervene in the markets.

RAPID INTEREST RATE MOVE FROM THE CENTRAL BANK

The Central Bank rapidly increased overnight interest rates and bond yields to prevent market volatility and curb the depreciation of the TL.

In the interbank market, the overnight interest rate rose by 370 basis points compared to the beginning of the week due to measures implemented by the Central Bank following the sharp depreciation of the TL, approaching the updated upper band of the interest rate corridor. The TLREF rose from 42.03 percent at the beginning of the week to 45.72 percent, causing the downward trend in interest rates to reverse.

FIRST INTERIM MEETING SINCE 2018

The Central Bank last held an interim meeting to raise interest rates in 2018. This time, it implemented its tightening policy step through an interim meeting and paused funding.

On Wednesday, the Central Bank increased foreign exchange sales, selling 11.2 billion dollars worth of foreign currency. Sales continued in the following days. Additionally, liquidity-enhancing steps such as TL-settled forward foreign exchange sales and a 56-day deposit auction were also put into effect.

SHARP RISE IN BOND YIELDS

As a result of domestic and foreign investors selling off TL bonds, a sharp rise was also seen in bond yields. The 10-year bond yield increased by 500 basis points from Wednesday, rising from 28 percent to 33.3 percent.

Furthermore, the 2-year bond yield climbed from 37 percent to 44.60 percent with a 700 basis point increase. This increase created a significant difference compared to the 7 percent level seen in 10-year bonds in February 2023. The 5-year bond yield also jumped from 32 percent to 39.19 percent, which was a record in the bond market.

TREASURY'S BORROWING COSTS ARE RISING

The rise in bond yields also has the potential to increase the Treasury's borrowing costs. The fact that the 5-year bond yield has reached a historic peak indicates that borrowing costs may increase. If this rise in interest rates does not recede quickly, the Treasury's borrowing costs will increase significantly, and this situation could lead to long-term pressures on Turkey's public finances.