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Turkish central bank surprised analysts. What will be with USD/TRY?

Commentaries & Views

he Central Bank of the Republic of Turkey has raised the interest rate by 7.5%, up to 25%. If you are wondering whether it’s a big or small move, we’ve got the answer – it’s colossal. Even the Turkish lira managed a slight uptick against the US dollar; it’s akin to witnessing a snowfall on a summer day in Istanbul. Let’s find out how significant this news is and what might lie ahead for the lira.

The recent presidential elections in Turkey brought about a development that seemed almost impossible for the local economy. Before that, the Turkish central bank gave up the orthodox economic policy by refraining from increasing the key rate. The impact on the inflation rate was evident (whisper: it wasn't particularly effective, as you might have guessed).

Following the elections, the new governor of the local central bank, Hafize Gaye Erkan, adopted more familiar strategies to combat inflation. The latest interest rate hike is already the third one under her management. A journey from 8.5% to 15%, then up to 17.5%, and now a whopping 25%.

However, if the first two hikes looked like cautious moves – the central bank didn't quite meet the expectations set by analysts – the new change took market participants by surprise. The expectations were set somewhere around 19-20%, not a full-on 25%. Speaking of changes, it's always a good idea to be ready for any market shifts. To predict tomorrow or next week's developments, you can rely on economic calendar, as it knows everything about the major economic events worldwide.

Let’s take a look at the chart reflecting the USDTRY pair's performance this summer. As you see, previous key rate hikes didn’t really prop up the lira, but the most recent one managed to push it to the 25.5 level.

At the same time, it’s still hard to notice this short-term TRY’s surge in the 5-year chart. In other words, this event hasn’t changed anything globally yet.

The other meaningful moment is the Turkish central bank's decision to do away with a scheme that shielded deposits from the lira's depreciation. Instead, there will be conventional lira deposits. In theory, it might become an extra incentive for the local economy.

Right now, the USDTRY is in the wait-and-see position. Analysts are keeping an eye out for the upcoming meetings of the local central bank. It’s essential to get the following currency movements. If the Turkish officials persist in their commitment to combat inflation, then it’ll be possible to discuss potential changes in USDTRY trends.

However, you might have a different take on this. Just remember that only your own analysis can bring you success in the markets.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.