The Turkish Lira (TRY) grabbed the spotlight in the foreign exchange realm on Thursday, leaping 7.7% against the US Dollar (USD) post the Central Bank of Turkey’s (CBoT) policy meeting.
While the USD/TRY exchange rate did recede slightly overnight into Friday, the currency remained 4.0% firmer than its pre-meeting stance.
At the time of writing, the US Dollar to Lira exchange rate (USD/TRY) is trading at 26.5496.
The Pound Sterling to Lira exchange rate is seen trading at 33.4021.
As discussed by analysts at MUFG, this unexpected upswing in the Turkish Lira (TRY) was attributed to CBoT’s decision to raise rates significantly by 7.50 percentage points, setting the policy rate at 25.00%.
“The strong rally for the lira was triggered by the CBoT’s decision to deliver a much larger-than-expected rate hike of 7.50 percentage points,” says Lee Hardman, Senior Currency Analyst at MUFG.
Elaborating on the broader context, Hardman highlights,”The policy rate has now been increased by 16.50 percentage points in total since June.”
This surge now surpasses even the highs seen during 2018 and 2019.
Drawing parallels from history, the strategist notes the USD/TRY’s performance on FX markets.
“On that occasion USD/TRY fell from a peak of 7.2362 in August 2018 to a low of 5.1344 in November 2018,” he adds.
The past data offers a hint: higher rates might again play saviour for the Turkish Lira (TRY).
“Higher rates should again begin to offer more support for the lira after the larger hike helped Turkey to regain policy credibility,” Hardman observes.
This credibility gain is complemented by Turkey’s pivot back to orthodox policies since the May elections.
A reinforced commitment to tackle inflation by the new leadership at CBoT, especially under the helm of Governor Erkan, is also evident.
Yet, challenges persist.
“The CBoT was under increasing pressure to deliver larger rate hikes after inflation accelerated back up to 47.8% in July,” says Hardman.
With an inflation projection of 58.0% by the year-end, Hardman anticipates an intensified policy response.
“As a result, we expect the CBoT to deliver further larger hikes at upcoming policy meetings to lift the policy rate closer towards 35.0%,” he suggests.
While these proactive measures might hinder any further TRY exchange rates’ depreciation this year, the analyst at MUFG exercises caution.
The Turkish Lira’s positive indications, Hardman believes, don’t necessarily herald the onset of a lasting rebound.