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Turkish Lira Tumbles After Central Bank Refrains from Interest Rate Hike

July 24, 2018 at 18:48 by Vladimir Vyun

Various TRY banknotesThe Turkish lira slumped today after the nation’s central bank surprised and disappointed market participants, refraining from increasing interest rates.

The Central Bank of the Republic of Turkey maintained its policy rate unchanged at 17.75% and said in the statement:

 

Recently released data indicate a more significant rebalancing trend in the economic activity. External demand maintains its strength, while signs of decelaration in domestic demand become more visible.

The announcement shocked experts, who were expecting the central bank to raise the rate by at least a percentage point to support the tumbling currency and to battle rapidly accelerating inflation, the same as it did at the emergency meeting last month. Annual consumer inflation climbed to 15.4% in June — the highest rate in 15 years and more than triple the central bank’s target. The lira has lost almost quarter of its value this year.

The surprise decision raised the question of central bank’s independence. The newly re-elected President Recep Tayyip Erdogan is known for his dislike of high interest rates and belief that they cause inflation, not weaken it. The refusal of the central bank to continue monetary tightening led to speculations that the President has too much influence on its decisions, preventing the bank from addressing country’s economic issues in an appropriate manner.

USD/TRY jumped from 4.7350 to 4.8810 as of 18:40 GMT today, touching the daily high of 4.9373 intraday. EUR/TRY rallied from 5.5381 to 5.7077, and its daily high was at 5.7814.

If you have any questions, comments, or opinions regarding the Turkish Lira, feel free to post them using the commentary form below.

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