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Update: Lira rallies as Turkey bumps up policy rate again

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Update: Lira rallies as Turkey bumps up policy rate again

The lira rallied against the U.S. dollar on June 7 after Turkey's central bank raised its one-week repo auction rate by 125 basis points to 17.75%.

Türkiye Cumhuriyet Merkez Bankasi AS recently set the one-week repo rate as its new benchmark, simplifying its policy framework.

Annual inflation accelerated to 12.15% in May from 10.85% in April, adding further pressure on the central bank to raise rates. In addition, domestic producer prices rose 20.16% annually in May from 16.37% the previous month.

"Despite the mild outlook for demand conditions, elevated levels of inflation and inflation expectations continue to pose risks on the pricing behavior. Accordingly, the Committee decided to further strengthen the monetary tightening to support price stability," the central bank said.

"Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement. Inflation expectations, pricing behavior and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered."

The central bank raised its late liquidity window interest rate to 16.5% from 13.5% toward the end of May, triggering an immediate reversal of a deep sell-off in the country's currency. Turkey's currency crisis was exacerbated by President Recep Tayyip Erdogan's comment made earlier in May that he might participate in monetary policy decisions.

Additional interest rate increases could be required in the future if lira continues to be weak or depreciates further and inflation continues to rise in the coming months, TD Securities said.

The lira was trading 1.74% higher against the dollar as of 8:46 a.m. ET.