Turkey’s Lira Plummets to Unprecedented Low Despite Attempted Rate Increase

ISTANBUL – The Turkish lira Plummetted by a staggering 3.3%, hitting an all-time low this Friday, as markets remain skeptical over President Tayyip Erdogan’s economic strategies, despite a significant rate hike by the central bank. Witness the plummet of Turkey’s Lira as it faces a severe plummet, shaking the financial landscape.

The lira plummeted to a record low of 25.74 against the dollar, marking a depreciation of roughly 27.3% for this year.

Despite a hefty 650 basis-point increase that took the key rate to 15% on Thursday, markets were not convinced by the central bank’s measures. Analysts had expected a more aggressive tightening initiative that would signal a long-term commitment to combatting inflation.

The hike’s impact was notably less than expected, suggesting a more gradual transition than anticipated, Goldman Sachs highlighted in a note.

The central bank, under the new Governor Hafize Gaye Erkan, appointed by Erdogan after his recent election victory, assured that further action would be taken in a “timely and gradual manner”.

Finance Minister Mehmet Simsek, well-respected within financial markets, echoed this sentiment stating, “The path towards price stability is going to be gradual but steadfast”.

This stands in contrast to the country’s previous approach of monetary easing, where the one-week repo rate had been reduced to 8.5% from 19% in 2021, despite spiraling inflation.

Despite the median estimate of a hike to 21% in a Reuters poll, the less substantial hike suggests that Erkan may be restricted in how aggressively he can combat inflation under Erdogan, who has been chipping away at the bank’s independence over the years.

As a result of the disappointment in the markets, the lira has seen an 8.5% decline since Thursday’s hike. A year from now, forward swap markets price the lira at 33 to the dollar, compared to around 30 before the rate increase.

Goldman suggests that without an interest rate anchor, “it will be difficult to fully float the (lira)” under the current macro-prudential measures.

Inflation, which hit a 24-year high of 85% last year due to Erdogan’s rate cuts, eased to just below 40% in May. Real rates remain heavily in the negative, and the central bank’s key rate also fails to meet deposit rates that reach up to 40%.

A senior Turkish official stated that a larger hike could have jeopardized the banking sector, emphasizing that gradual steps help prevent abrupt volatility.

However, Turkey’s international bonds have stabilized, and the longer-dated issues are seeing minor gains following sharp falls on Thursday after the rate decision. Yet, the cost of insuring exposure to the country’s debt through credit default swaps continues to rise, as shown by data from S&P Global Market Intelligence.

Amid these economic challenges, Erkan is set to meet with a group of bank executives, a source told Reuters. This follows a meeting held last week by Simsek, who discussed ongoing issues within the banking sector. Stay informed and prepared for the repercussions of Turkey’s Lira’s plummet, and navigate the ever-evolving global market with confidence.