Turkish Lira Falls to New All-Time Low After Central Bank Rate Hike

Turkey’s Central Bank Raises Rates for the First Time in 27 Months, but Lira Reacts Negatively

The Turkish lira has fallen to a new historical low after the decision of the Central Bank of Turkey to raise the rate for the first time in 27 months. The dollar rose above 24 lire for the first time. As of 14:33 Moscow time, the dollar exchange rate on the international Forex market rose by 2.85% to 24.24 lira per dollar. The previous historical low of the Turkish currency was recorded at the auction on June 12 at the level of 23.92 lira per dollar.

On Thursday, June 22, a meeting of the Central Bank of Turkey on the rate was held. The key rate grew by 650 bp – up to 15%. The Turkish regulator raises the rate for the first time in 27 months – since March 2021. The next meeting of the Central Bank of Turkey will be held on July 20.

Since 2021, the discount rate of the Central Bank of Turkey has been consistently reduced, despite the weakening of the lira and high inflation in the country. The rate was lowered from 19% in 2021 to 8.5% per annum by February 2023. Since then, the Central Bank of Turkey has not raised the interest rate, leaving it unchanged.

In June, Turkish President Recep Tayyip Erdogan appointed the head of the country’s central bank, Hafize Gaye Erkan, who worked for Goldman Sachs for nearly a decade. Investors and economists interviewed by the Financial Times conceded that Erkan’s appointment may indicate Erdogan’s desire to move towards “more traditional policies”, namely a significant increase in the key rate in order to slow inflation and attract foreign investors who have left the country.

The decision to raise the rate coincided with market expectations. However, the increase itself was less than expected. Medium evaluation interviewed Reuters economists assumed an increase of 12.5 percentage points, that is, up to 21% this month.

Analysts’ forecasts on the eve of the decision of the Central Bank of Turkey on the rate:

– Goldman Sachs Group — promotion up to 40% at the meeting in June;
– JPMorgan — promotion up to 25% in June and up to 30% or higher before the end of the year;
– Morgan Stanley — up to 20% in June and up to 25% in August;
– Deutsche Bank — up to 25% in June or up to 25% as a result of two increases in June (up to 18-20%) and July;
– General Society — up to 15%;
– Standard Chartered — up to 14%.

“We do not rule out the need for slightly higher rates this cycle, but do not expect rates above 30% in any case,” Deutsche Bank analysts said. The bank also expected statements from the Turkish authorities about the possibility of further, less aggressive rate hikes at the next meetings.

Why did the Turkish lira fall?

Over the past year, the Turkish lira has fallen by more than 36% against the dollar. At the beginning of the year, the dollar was worth about 18.7 lira on the international Forex market. Before the first round presidential elections in Turkey, on May 14, the dollar rose to 19.6 lira. After Erdogan’s victory on May 31, the national currency of the republic updated its historical minimum and reached 21.0304 lira per dollar. In June, the growth of the exchange rate accelerated and on June 7, the dollar was already worth more than 23 liras. The historic low of the Turkish currency was recorded at the auction on June 12 at the level of 23.92 lira per dollar.

High inflation in Turkey remained the fundamental reason for the weakness of the lira, analysts at VTB My Investments said. According to the latest data, inflation in the country is about 40%. Such inflation is caused by the policy of the Central Bank of Turkey, which, at the direction of the incumbent President Recep Tayyip Erdogan, kept the Central Bank rate at 8.5%, that is, much lower than the inflation rate. The Central Bank of Turkey is the only major central bank in the world that has pursued such an unconventional monetary policy.

The policy of the Turkish regulator ran counter to the actions of the central banks of most developed countries, which raised rates in an attempt to contain record inflation. Thus, since March last year, the US Federal Reserve raised the rate ten times in a row, it increased by a total of 500 bp. The ECB has raised interest rates eight times in a row since July 2022, by a total of 400 bps.

Erdogan has so far opposed the rate hike, arguing that it is an ineffective way to deal with rising prices. Monetary policy in Turkey is aimed at stimulating economic growth and export competition, and not at curbing inflation.

Turkey’s latest monthly inflation data for May showed growth of the consumer price index by only 0.04% mom, which may create the illusion thatnal debt. These factors contribute to the weakening of the lira and make it vulnerable to market fluctuations.

Investors and economists have been closely watching the actions of the Central Bank of Turkey, as they believe that a rate hike is necessary to stabilize the currency and attract foreign investors. The decision to raise the rate by 650 basis points to 15% was seen as a step in the right direction. However, the increase was less than expected, causing disappointment among investors.

Analysts had predicted a larger rate hike, with some expecting an increase of up to 40%. The lower-than-expected increase may indicate that the Central Bank is still hesitant to take more aggressive measures to combat inflation and stabilize the currency.

The Turkish lira’s fall to a new historical low against the dollar highlights the challenges facing the country’s economy. High inflation, a large budget deficit, and external debt have put pressure on the lira and eroded investor confidence. The rate hike was seen as a necessary step to address these issues, but its limited impact on the currency’s value raises concerns about the effectiveness of the Central Bank’s measures.

President Erdogan’s appointment of Hafize Gaye Erkan as the head of the Central Bank was seen as a signal of a shift towards more traditional policies. Erkan, who previously worked for Goldman Sachs, is expected to prioritize inflation control and attract foreign investment. However, the success of these efforts remains uncertain.

Going forward, the Central Bank of Turkey will need to closely monitor the economic situation and take decisive actions to stabilize the currency and address inflation. The next meeting of the Central Bank is scheduled for July 20, where further rate hikes may be discussed.

Overall, the Turkish lira’s fall to a new historical low reflects the challenges facing the country’s economy. The rate hike by the Central Bank is a step in the right direction, but its limited impact on the currency’s value raises concerns about the effectiveness of the measures taken. The coming months will be crucial in determining the future trajectory of the Turkish lira and the country’s economic stability.

s a major factor contributing to the fall of the Turkish lira. In May, the annual inflation rate reached 16.59%, the highest level in nearly two years. The central bank’s decision to raise interest rates is aimed at curbing inflation and stabilizing the currency. However, the increase of 6.5 percentage points was seen as insufficient by many analysts and investors, leading to a negative reaction in the currency markets.

The appointment of Hafize Gaye Erkan as the head of the central bank was seen as a signal of a shift towards more orthodox economic policies. Erkan’s background in Goldman Sachs and her reputation as a market-friendly economist raised hopes that she would take decisive measures to address the economic challenges facing Turkey. However, the modest rate hike has raised doubts about the government’s commitment to tackling inflation and attracting foreign investment.

The depreciation of the Turkish lira has significant implications for the country’s economy. It increases the cost of imports, which could lead to higher prices for goods and services. It also makes it more expensive for Turkish businesses to repay their foreign currency-denominated debts. This could put additional pressure on an already fragile banking sector and increase the risk of financial instability.

The central bank’s decision to raise interest rates is a step in the right direction, but more needs to be done to restore confidence in the Turkish lira. The government should implement structural reforms to address the underlying causes of inflation and improve the business environment. It should also communicate its economic policies more effectively to reassure investors and prevent further volatility in the currency markets.

In conclusion, the Turkish lira has fallen to a new historical low after the central bank’s decision to raise interest rates. The increase was less than expected, leading to a negative reaction in the currency markets. The depreciation of the lira poses significant challenges for the Turkish economy, and more decisive measures are needed to restore stability and attract foreign investment.

How might the appointment of Hafize Gaye Erkan as the head of the central bank and the upcoming meeting on July 20 influence the future trajectory of the Turkish lira, the country’s economic stability, and its ability to combat high inflation

The Turkish lira has hit a new all-time low after the country’s central bank raised interest rates for the first time in 27 months. The decision to raise rates by 650 basis points to 15% was seen as a positive move to stabilize the currency, attract foreign investors, and combat high inflation. However, the increase was less than expected, causing disappointment among investors. The lira has fallen by more than 36% against the dollar in the past year due to high inflation and the central bank’s unconventional monetary policy. President Erdogan’s appointment of Hafize Gaye Erkan as the head of the central bank was seen as a shift towards more traditional policies. The next meeting of the central bank is scheduled for July 20. The fall of the lira reflects the challenges facing Turkey’s economy, and the coming months will be crucial in determining the currency’s future trajectory and the country’s economic stability.