Market Overview

19 November 2021

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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Mark Goichmann
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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