The Turkish lira rose slightly on Thursday after the Central Bank of the Republic of Turkey (CBRT) delivered a surprising rate decision. The USD/TRY pair retreated to 31.77, lower than this week’s high of 32.50.
CBRT surprise rate hikeThe CBRT concluded its two-day meeting on Thursday and caught investors and economists off-guard. The bank decided to hike interest rate by 500 basis points to 50% in a bid to slow the elevated inflation and boost the lira.
It also boosted the overnight borrowing rate from 43.50% to 47% and the overnight lending rate from 46.50% to 53%. This increase was higher than what the bank had guided in its last meeting.
The CBRT is reacting to the fact that inflation is still red hot even after its recent rate hikes. The most recent data showed that the country’s inflation surged to 67.07% in February from the previous 64.86%. Economists expect that inflation will peak mid this year.
Turkish central bank also expects that inflation will deteriorate in the coming months. This explains why the bank left the door for another rate hike wide open. The statement added that:
“Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation outlook is foreseen”
In a statement, analysts at ING wrote that:
“These moves will likely further ease concerns about the CBT’s plans to bring down inflation, contribute to support both local and foreign investors’ confidence in TRY assets and help anchor inflation expectations.”
The CBRT decision came hours after the Fed delivered a moderately dovish interest rate decision. In it, the bank decided to leave rates unchanged between 5.25% and 5.50%. The dot plot showed that the bank would deliver three rate cuts later this year.
Implications for the Turkish lira
The USD/TRY pair has reacted mildly to the recent actions of the CBRT as it hiked rates from 8.50% to 50%. As I explained on Wednesday, there are two main reasons for this price action. First, inflation has remained sharply above the country’s inflation.
Second, there are concerns about the Turkish lira confidence among residents and companies. Most of these people have seen their purchasing power deteriorate in the past few decades. Therefore, many of them continue to prefer to hold foreign currencies.
Still, there is a likelihood that the Turkish lira will likely rebound later this year if Turkey’s inflation starts to drop. This rebound will also happen if the Turkish central bank maintains its dovish tone while the Federal Reserve starts to cut rates.
Therefore, the Turkish lira is a high-risk and high-reward investment for now. If history repeats itself, the currency will continue falling, with the next point to watch being at 33. The contrarian view is where the USD/TRY pair retreats to 30.
We have seen some embattled currencies surge recently. For example, after crashing to 160 earlier this month, the Kenyan shilling has rebounded to 130 against the US dollar.
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