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Market Overview
The Turkish Central Bank Dumped the Lira at a Record Pace
The Turkish
Lira has performed a record weakening after the central bank of Turkey cut its
one-week repo rate to 15% from 16%. USDTRY immediately soared to an all-time
high above the 11.00 level.
The Central
bank’s decision might seem to be astonishing, but it is in line with the
seemingly obvious moves that have been made amid pressure from Turkish
President Recep Tayyip Erdogan. Turkey is experiencing enormously high
inflation which is around 20%. Nevertheless, the monetary policy is moving
towards easing and not tightening as most monetary policymakers would curb
inflation pressures, according to a classical practice. Turkey continues to
lower interest rates from 19% in September 2021 according to the ideology of
the Turkish leader that revolves around the ideas that by lowering borrowing
costs one may lower inflation too. Mr. Erdogan is known for blasting his criticism whenever there is an
attempt to increase borrowing rates while following a strange, unorthodox view
that high interest rates cause, rather than tame, inflation. So, he keeps
criticising central bankers that abide by traditional set of monetary instruments and actions, which are
quite the opposite of Erdogan’s ideology.
So Turkey
has established its own sequence of events in a response to blistering
inflation. Mr. Erdogan demanded that interest rates be lowered, to which the Turkish
Central bank abided. This caused the devaluation of the Lira and rising
inflation. Then the monetary regulator hiked interest rates to tackle inflation
followed by a critical huff of the Turkish leader and the firing of the
governor. The new governor then lowered the interest rate causing a new wave of
inflation and the devaluation of the currency. And the sequence continues
again.
At this point,
the Turkish Lira may be a subject of a technical correction amid profit taking
by investors who bet on an almost guaranteed slash of interest rates by the
Turkish central bank if past performance repeats itself. This correction may
lead the USDTRY to dive to 10.17-10.40. But overall, the trend of the Lira
weakening is still intact.
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