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Shock as Turkish Central Bank Stands Pat on Interest Rates; Lira Plunges

The Turkish lira shed 3.3 percent in a matter of seconds on Tuesday afternoon after the Turkish central bank left its benchmark interest rate unchanged at 17.75 percent, defying the market’s unanimous forecast for a 100-basis point hike.

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USD/TRY spiked on the shock decision, announced at noon in London and 2pm in Ankara; it jumped to 4.915 from 4.751, and climbed further towards 4.938 within the thirty-minute period that followed.

An interest rate hike by the Central Bank of the Republic of Turkey (CBRT) was deemed necessary by analysts, who point to June’s annualized inflation print of 15.4 percent – the highest since 2004. A lack of action on Tuesday now calls into question the independence of the CBRT and investors will suspect political interference. Turkish President Recep Tayyip Erdogan has long been a critic of high interest rates and in a worrying move, he recently appointed his own son-in-law, Berat Albayrak, as finance minister, giving the Erdogan family a great deal of influence over matters affecting the economy.

The CBRT wrote in its press release that it would be “necessary to maintain a tight monetary stance for an extended period,” and that it would “continue to use all available instruments in pursuit of the price stability objective.”

How exactly the CBRT intends to achieve price stability if not using the primary tool of monetary policy management, interest rates, is anyone’s guess.

Approaching the end of the European FX session, the lira had recovered marginally into the high 4.8s relative to the dollar. A further depreciation in the coming days (highly likely) of only 2 percent would see the currency weaken to a record low, currently at 4.9734. A bigger magnet for price will be the symbolic rate of 5.0 to the dollar which is also well within striking distance.

Speaking to the Wall Street Journal on Tuesday, Viktor Szabo of Aberdeen Standard Investments said that Turkey would now need to “get lucky with the external environment” in order to avoid a broad currency sell-off.

 

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