Turkish Lira After 5 Months of Traditional Monetary Policy. What Has Changed?

Almost half of a year has passed since the central bank of Turkey changed its monetary policy in favor of interest rate hikes, the most traditional economic approach. Sufficient time has elapsed to draw conclusions and assess whether the lira has any prospects for halting its decline. So, let's delve into it.

The Central Bank of the Republic of Turkey first increased the key rate in June, moving it from 8.5% to 15%. Subsequently, there were several more interest rate hikes, totaling 35%. A substantial increase, isn’t it? However, examining the USD/TRY chart reveals that it couldn’t stop the lira’s decline under any circumstances. Plus, the proximity of Turkey to the Israeli-Palestinian conflict has had an adverse effect on the lira’s exchange recently.

Additionally, taking a closer look at the USD/TRY movement over the past five years carries us back to times when the lira’s rate was about 5 or 6 – a reality not too long ago. Nonetheless, if the Forex market scales are not enough, attention can be directed to other assets like stocks, utilizing various tools for success. One such tool is the earnings calendar, providing timely information about companies’ financial reports.

While interest rate hikes typically support national currency, in this case they didn’t assert much influence for a good reason. Truth be told, for a score of reasons. First, changes in the interest rate haven’t affected inflation, which holds 60%. Clearly, local authorities need additional time to stabilize the situation.

Other significant factors include the need for de-dollarization and the resurgence of foreign investments, both of which are problems created by the unconventional monetary policy. Locals were reluctant to keep money in liras due to currency depreciation, opting for US dollars. Furthermore, foreigners were hesitant to invest in the Turkish economy and businesses, resulting in damaged trust that is challenging to restore.

Among the other factors, there's the dominance of imports over exports and a possible insufficient decline in USD/TRY in previous years, suggesting Turkey may have a deficit of foreign currencies, causing the lira to drop against the dollar less than it should have.

Simultaneously, experts increasingly claim that the Turkish market is taking initial steps towards easing the situation. Notably, many recommend keeping an eye on local bonds in 2024, suggesting they might be an interesting choice in emerging markets.

However, the outlook for the lira remains uncertain. There are no signs indicating a change in the USD/TRY trend, though the decline is unlikely to be as rapid as in the summer of 2023.