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Turkish Lira Strengthens As Central Bank Raises Interest Rates Again

December 24, 2020 at 16:13 by Andrew Moran

Closeup of the Turkish 20-lira noteThe Turkish lira recorded a massive gain against the US dollar on Christmas Eve, driven by the central bank tightening monetary policy and raising interest rates again in its final policy meeting of 2020. Over the last two months, the lira has significantly rebounded after falling to fresh all-time lows. And, according to the early forecasts, the lira could strengthen even more heading into 2021.

On Thursday, the central bank of Turkey increased its benchmark one-week repo rate by 200 basis points to 17%, the highest level in 18 months. The market had penciled in a rate hike of 150 basis points. This also represents the second consecutive rate hike, with the first one resulting in a 475-basis-point boost.

Ankara is stuck between a rock and a hard place. On the one hand, the domestic economy is recovering and posting positive economic data. On the other, there is uncertainty in the broader economy regarding the resurgence of coronavirus cases. This was pointed out by central bank officials.

Still, foreign exchange markets were pleased by Turkey’s progress toward adopting more of an orthodox approach to monetary policy. After slashing interest rates to record lows, the lira had cratered to its lowest level on record. But can the lira maintain the momentum next year?

The weekly foreign exchange reserves data has advanced for five consecutive weeks. In the week ending December 18, Turkey’s forex reserves stood at $49.8 billion, the highest they have been since the end of July.

Earlier this week, the consumer confidence index was unchanged at 80.1 in December, falling short of the median estimate of 82. While consumers are optimistic about Turkey’s general economic situation, they are more pessimistic about their financial situation. That said, most consumers still anticipate to purchase durable goods over the next 12 months.

Goldman Sachs recently improved its outlook for the lira for the second straight month. The financial institution is concerned about the central bank’s plans to rebuild forex reserves, but analysts are confident that markets will give the new policymakers the benefit of the doubt.

The Wall Street titan forecasts that the lira will trade 7.50, 7.75, and 8.00 in three, six, and 12 months. This would support the latest numbers showing that the lira has been one of the world’s top performers against the greenback since November.

The USD/TRY currency pair tumbled 0.74% to 7.5832, from an opening of 7.6398, at 15:07 GMT on Thursday. The EUR/TRY fell 0.77% to 9.2381, from an opening of 9.3101.

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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