TRY Craters Despite CBRT Rate Hike Higher Than Expected

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CBRT Lifts Rates 0.75%

As downward pressures on price has continued over recent months, Turkey’s central bank today took action to address the situation by lifting its headline interest. While a rate was widely signalled at today’s meeting, in line with central bank commentary and the wider industry view on the Turkish economy, the CBRT took the markets by surprise as it raised rates by 0.75%, well above the 0.25% forecast. The Turkish late liquidity window rate now sits at 13%.5%, up from 12.75% prior

The move comes in the wake of President Erdogan calling snap elections in the country just four months ago and marks the first rate hike since the elections were announced. The most recent Reuters poll ahead of the rates meeting showed that 10 out of the 13 economists and industry analysts polled, forecast a rate hike with most agreeing on a .25% hike being the most likely option.

Turkish Elections Brought Forward

Just last week President Erdogan announced that the elections, both presidential and parliamentary, will be held on June 24th, unexpectedly pulling the voting ahead by over a year, citing the need for Turkey to move to a new executive presidency system to tackle the economic issues presented in Syria.

This latest move in rates represents the most recent attempt by the CBRT to battle soaring inflation in the country, which has been running in double digits for some time. However, this fight has been made increasingly difficult by the sharp sell-off in the Turkish Lira which has been exacerbated by the President’s desire for lower interest rates, indicated as the TRY craters despite CBRT rate hike.




Erdogan An Enemy of Interest Rates

A Erdogan has repeatedly described himself as an “enemy of interest rates” and has long called for reductions in borrowing costs. This has provoked fears that monetary policy in the country is not independent. However, this latest CBRT rate hike flies in the face of this notion.

In the statement released along with its decision, the CBRT said that “Current elevated levels of inflation and inflation expectations continue to pose risks on the pricing behaviour. Upside movements in import prices have increased such risks.” The statement also added that “Accordingly, the committee decided to implement a measured monetary tightening to support price stability.”

Forward Guidance

Looking ahead the statement said a “tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement, independent of base effects and temporary factors, and becomes consistent with the targets.”

Currently, inflation in Turkey is still running around 10% year on year, double the CBRT’s target. With the Turkish Lira down around 7% on the year against the USD, many players are expecting further rises in inflation for Turkey, which in turn should increase the downward pressure on the currency.

Notably, ahead of today’s meeting, some players were calling for a rate hike of more than 1% in order to tackle high inflation, seemingly as the TRY craters despite CBRT rate hike. It doesn’t seem to be enough to convince markets that the CBRTS has the means and the willingness to act effectively either.

Technical Perspective

TRY Craters Despite CBRT Rate Hike 1

While there was some initial TRY buying in response to the rate hike, this soon subsided and TRY is once again falling against USD. The weekly timeframe chart show that USDTRY is still sitting above key support at the 3.9426 – 3.9858 level which was the 2016 and 2017 high level. While above this level, further TRY losses are expected as the market consolidates before making a fresh push higher.





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