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Turkish Lira Pares Gain As Central Bank Leaves Interest Rates Unchanged

June 25, 2020 at 13:52 by Andrew Moran

Various TRY banknotesThe Turkish lira is struggling for direction on Thursday as the central bank unexpectedly left interest rates unchanged for the first time in a year. Policymakers are ostensibly concerned about ballooning inflation, while analysts are worried about depleting foreign exchange reserves. The lira had bounced initially on the news before trimming its gains, leaving many to wonder where the currency is headed.

On Thursday, the Central Bank of the Republic of Turkey surprised market observers by suspending its year-long monetary easing cycle. It left its benchmark rate at 8.25%, although economists had forecast a 25-basis-point cut at the institution’s June policy meeting. It is unclear if the body will slow down its money-printing efforts since it has pumped a lot of lira into the markets to support the economy this year.

According to the central bank’s statement, there has been a coronavirus-related jump in unit costs that have triggered an increase in the core inflation indicators. Turkish officials forecast that demand-driven deflationary effects will transpire in the second half of 2020 as the economy reopens and normalizes.

Overall, the Monetary Policy Committee (MPC) thinks business activity will recover, exports will rebound, and low commodity prices will support the current account balance in the coming quarters.

The lira soared against many of its currency rivals before paring its huge gains.

Despite not cutting rates, the 11.4% inflation rate has suppressed real interest rates into subzero territory. President Recep Tayyip Erdoğan believes lower borrowing costs can slow inflation. He terminated Governor Murat Uysal’s predecessor last summer for failing to slash rates.

In recent days, there have been welcoming economic data for the Erdoğan regime. Consumer confidence climbed to 62.6 this month, up from 59.5 in May. Business confidence spiked to 92.6 in June, up from 76.9 in the previous month. Capacity utilization came in at 66% this month, up from 62.6% a month ago.

At this point, aside from inflation, analysts are concerned about the rising federal government debt and depleting forex reserves. The government has taken on more debt to pay for its pandemic-related stimulus and relief packages, including a costly wage support package that leaders will soon end. The central bank has been selling its foreign currency holdings to elevate the lira, which collapsed as much as 23% in April.

The USD/TRY currency pair dipped 0.01% to 6.8551, from an opening of 6.8563, at 13:43 GMT on Thursday. The EUR/TRY fell 0.4% to 7.6843, from an opening of 7.7137.

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