The Turkish lira experienced a significant drop to reach unprecedented lows, following the decision by Turkey's central bank to raise the country's benchmark interest rate. In a remarkable reversal of monetary policy, the central bank implemented a staggering 650 basis points hike, pushing the key interest rate from 8.5% to 15%. This marked the first rate increase since March 2021, albeit falling below the anticipated 21% rise predicted by Reuters.
Under President Recep Tayyip Erdogan's reelection, the lira has been steadily declining, and it recently traded at 25.00 against the US dollar. Financial experts, such as Steve Hanke, a professor of applied economics at Johns Hopkins University, expressed concern over the situation, noting that the lira's performance is severely deteriorating and may continue to do so due to the delayed response from the central bank.
Governor Hafize Gaye Erkan, who assumed the role recently, hinted at the possibility of further interest rate hikes until inflation in the country shows signs of improvement. In a statement, Erkan emphasized the need for ongoing monetary tightening, indicating that adjustments would be made in a timely and gradual manner to achieve a significant enhancement in the inflation outlook.
Notably, Turkey's state banks refrained from intervening to support the lira following the central bank's interest rate hike. This development potentially indicates a pivotal shift in the nation's monetary policy. Previously, state banks consistently intervened in the foreign exchange market on behalf of the central bank to defend the currency. However, after the elections held in late May, the interventions were temporarily halted and only resumed on June 8 when the lira experienced a 7% decline.
The disappointment over the Turkish central bank's decision to raise the benchmark one-week repurchase rate to just 15%, far lower than expected, contributed to the lira's sharp decline. Monetary policymakers clarified that they aimed to gradually transition away from an era of remarkably low interest rates.
In response to these developments, investment banks have once again projected a decline in the lira's value. Citi strategists anticipate that the central bank may adopt additional measures, including partially removing mechanisms protecting lira deposits with banks, which could further drive up the demand for dollars. "Bank of America" highlighted their expectation that the Turkish central bank will progressively reduce its influence on the exchange rate, allowing the currency to move more freely over time.
