The Turkish central bank (CBRT) stunned the market with a 6.25% hike in the interest (one-week repo) rate, which leaves the country’s interest rate at 24% – up from 17.75%. Turkey, which was slapped with an import duty of 25% and 50% on aluminum and steel, respectively, by the US, continues to face a severe economic crisis.
The exchange rate of the lira recently plunged to a historic low as inflation reached its highest level in 15 years. To contain the inflation, economists were suggesting that the central bank become realistic with rate hikes and discard the country’s President Erdogan’s continuing demand for a lower interest rate.
Turkish central bank responds positively to economists’ suggestion
The Turkish central bank has come to understand the need to contain inflation which has raised the interest rates to the highest mark since Erdogan took the helm 15 years ago. The decision was made by the Monetary Policy Committee, led by central bank Governor Murat Cetinkaya. With the announcement, the central bank has defied the President’s repeated demand for lower borrowing costs.
A survey, conducted by Bloomberg, indicated that economists were looking for a rate hike of 325 basis points. The announced hike, almost double the expectations of economists, sparked a rally in the Turkish lira. The currency market was taken by surprise because Erdogan had defined higher interest rates as a “tool of exploitation” only a few hours before the announcement was made.
The Turkish lira strengthened to 6.13 levels, following the announcement, up from 6.74 levels the day before against the US dollar.
The CBRT’s announcement indicates that either the President is losing his grip on the central bank or that the level of the central bank’s autonomy is more significant than previously imagined.
The statement that accompanied the rate hike also indicated that the central bank is ready to implement further monetary tightening, if necessary. The bank also revealed that it would maintain high-interest rates until inflation comes under control. The larger-than-expected hike suggests long-term stability for the lira.
Commenting on the rate hike, Tim Ash of Bluebay Asset Management LLC, said: “Great decision — made all the more difficult by the huge pressure on the central bank from Erdogan. The Turks just gave themselves a chance to hold the lira and rebuild the trust of the market.”
Likewise, Justin Low, an analyst at LiveForex said “This is certainly enough to calm some nerves faced by the lira for the time being. The bigger question now will be if the central bank can maintain its independence in light of Erdogan’s comments earlier in the day?”
Erdogan issued an executive order yesterday, forcing a settlement of a contract between two entities by using only lira’s. The Official Gazette indicates the rule applies to all contracts related to property, transportation, real estate, financial leasing, and other kinds of products and services.
Hulusi Belgu, head of the Turkish shopping malls investors association, stated that the measure would result in “total chaos” and is quite impossible to implement within the suggested time frame. He further noted that the property sector has a debt of over $15 billion and that nearly 70% of all contracts related to shopping malls were priced in international currencies.
Traders should note that all recoveries should be used to go short or book profit in the Turkish lira until the economy shows signs of improvement. Technically, the historical price chart indicates that the USDTRY pair is still in the uptrend. The momentum is still strong, while the currency pair continues to move within the ascending channel.
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