Just what the lira needed.

Having suffered the worst start to the year of any emerging market currency, Turkey’s long-suffering lira has hit its strongest level of the year after the country’s central bank surprised markets with a dose of monetary tightening this month.

The lira is up 0.54 per cent against the dollar today after notching up a 0.1 per cent climb yesterday to take it to the highest level since early January at TRY3.5566.

In its latest monthly decision on Wednesday, the Turkish central bank kept its three main rates on hold but opted to bump up its liquidity lending rate by half a percentage point. At 12.25 per cent, the rate is now the highest among Turkey’s major EM peers.

The decision comes just over a week after the country voted narrowly to approve a major revamp of the Turkish constitution, handing sweeping executive powers to president Recep Tayyip Erdogan.

Coupled with security fears and a slowing economy, investors’ concerns over Turkey’s deteriorating democratic institutions have helped drive the lira to record lows in 2017.

“The central bank is taking advantage of the tight political spot the Erdogan administration finds itself in post-election to improve its own monetary policy flexibility,” said Tim Ash at BlueBay Asset Management. The referendum was passed by a slim majority of 51 per cent.

The lira has now strengthened over 4 per cent since the referendum and should help dampen inflation of 11 per cent in the country – more than double the central bank’s 5 per cent target rate and a 2008 high.

Analysts at Fathom think the appreciation has longer to run, forecasting the lira will be another 7 per cent stronger against the dollar by the end of the year.

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