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Fred Cole

An editor at FOMOdrive

  • Jun 30, 2023
  • 2 min read

The Turkish lira collapsed after a sharp increase in the rate of the Central Bank

Turkish lira bills

On Thursday, the Central Bank of Turkey increased the key rate by 650 basis points in one go, bringing it up to 15%.

A sharp fall in the Turkish lira was caused by the market's expectation of a more substantial increase.

The dollar exchange rate has increased by over 3%, and for the first time ever, it has surpassed the 24 lira/$ mark.

The Central Bank of Turkey sent a strong signal to the market by raising its key rate from 8.5% to 15% per annum, which was lower than the average analysts' forecast of 20-21%. This warning of further increases was met with surprise.

The news reported that the dollar has reached a new record high of 24.6 lira per dollar.

RBC reported that the Turkish Central Bank's first key rate decision under the leadership of Hafize Gaye Erkan, who was appointed chairman in early June, was taken in March 2021. This marked the first tightening since her appointment, which came a week after the re-election of President Erdogan.

The market anticipated that, with Erkan as the new chairman, the Turkish regulator's policy would become more conventional - meaning the Central Bank would raise rates in response to increasing inflation. Previously, Erkan had held senior positions at Goldman Sachs and First Republic.

Since 2021, Turkish President Erdogan has implemented an unconventional monetary policy. Despite the lira's depreciation and high inflation in the country, the Central Bank of Turkey has steadily decreased its key rate from 19% in 2021 to 8.5% per annum by February 2023.

By the end of May, the official annual inflation rate in the country was estimated to be around 40%, and by October 2022, it had risen to a peak of 85%. However, independent estimates of inflation for May were even higher, at over 100%.

Morgan Stanley has predicted that the USD/TRY pair could reach 28 lira/$ by the end of the year, due to the worsening of the situation in Turkey caused by the large deficit of the state budget and the balance of payments, as well as a significant external debt.

The tightening of monetary policy in Turkey may have a minor effect on the economic processes in Russia through the export channel due to the close cooperation between the two countries.

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