The Turkish lira (TRY) has undergone a harrowing descent throughout 2023, plummeting to successive record lows against the US dollar (USD) and a basket of currencies.
Analysts attributed the freefall to a confluence of factors—ranging from a substantial budget deficit, and rampant inflation, to a meager foreign exchange (Forex) reserve.
Notably, the steadfast adherence to a loose monetary policy by the government in Ankara stands out as a major catalyst for the currency’s alarming depreciation. While the rest of the world adopted aggressive rate-hiking measures to combat soaring inflation, Turkey’s reluctance led to a severe devaluation.
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At the time of publication on November 23, the TRY was sitting at 28.7 against USD, close to an all-time low.
Recognizing the gravity of the situation, the Turkish government and central bank executed a surprising policy reversal, implementing a series of rate hikes, with the latest one announced on November 23.
Turkey delivers higher-than-expected rate hike
Turkey’s central bank raised its key one-week repo rate by an additional 500 basis points to 40%.
Surprising in its extent, the hike came as a shock as economists had anticipated a 250-basis-point increase.
The move represents the latest in a series of the bank’s recent moves to fight the depreciating lira and, which soared to a whopping 61% last month.
Surprising in its extent, the hike came as a shock as economists had anticipated a 250-basis-point increase. Representing the latest in a series of moves by the bank to combat inflation and a depreciating lira, this decision was a significant pivot.
“Really impressive move by the CBRT [Central Bank of the Republic of Turkey] – probing their orthodoxy and getting well ahead of expectations. These guys and girls are serious about fighting inflation,” he added. “We need to give them credit for that.”
– Timothy Ash, emerging markets strategist at BlueBay Asset Management said in a note.
Commerzbank analysts say risks persist for lira
The Turkish central bank recently demonstrated its readiness to rein in the skyrocketing prices, however, analysts at Commerzbank stick to predictions of a rough ride for lira.
The strategists said the market is “ever watchful of Erdogan pulling the plug or beginning to demand rate cuts as soon as some improvement has been achieved. Either outcome would be disastrous.”
“External disinflation may be helping other Eastern European countries at present, but it may not help Turkey.”
As such, the risks accompanying the Turkish monetary policy and its local currency “remain elevated despite the appearances,” the analysts wrote.
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