Turkey: Lira slides to new record low as Central Bank delivers unexpected rate cut
October 4, 2021
The Turkish lira tumbled drastically at the close of Q3, reaching a new all-time low of TRY 8.92 per USD on 29 September. On 1 October, the currency traded at TRY 8.86 per USD, which marked a 6.4% month-on-month depreciation against the greenback, while it was down 12.5% year-on-year and 16.1% year-to-date on the same day.
The sudden drop reflected the impact of the Central Bank’s unexpected decision to lower the one-week repo rate by 100 basis points to 18.00%, despite the recent upward trend in inflation and an unfavorable inflation outlook. The Bank’s decision to ease its stance, which was followed by a more dovish shift in tone in recent weeks, was likely influenced by pressure from President Erdogan, who has repeatedly expressed his opinion that the interest rate should be lower.
Going forward, the lira will remain under notable pressure against the USD in the remainder of the year and into 2022, amid political interference in the country’s monetary policy-making, which bruises the credibility and independence of the Central Bank. This in turn hurts investor sentiment and diminishes appetite for Turkish assets. Moreover, with inflation forecast to remain elevated, any additional easing of the monetary stance risks an even more negative real interest rate, which will further weigh on investor sentiment.
Muhammet Mercan, chief Turkey economist at ING, added:
“In the near term, the CBT’s less restrictive policy stance will likely weigh on the exchange rate outlook, and further deteriorate expectations adding to already high inflationary pressures.”
Author: Jan Lammersen, Economist