Earlier this month the Turkish Lira fell to a record low against the US Dollar as Turkish President Recep Tayyip Erdogan criticised the nation’s central bank for not taking an aggressive enough approach to cutting interest rates.
At the time Erdogan commented; ‘It is called an independent institution. Unfortunately, this is the point where we end up when [the central bank] is independent. We need to be at a better point and succeed in this.’
The Lira slumped by 2% against the US Dollar in the wake of these remarks, hitting a low of 2.4570.
Disappointing US data and a set of dovish meeting minutes from the Federal Open Market Committee (FOMC) have since seen the USD/TRY pairing return to trending in the region of 2.4767.
Given the political pressure being exerted on the Central Bank of the Republic of Turkey, today’s decision to slash borrowing costs hardly came as a surprise.
This time around, the institution slashed the benchmark one-week repo rate from 7.75% to 7.5%.
The overnight borrowing rate was also reduced to 7.25% from 7.5% while the overnight lending rate was reduced from 11.25% to 10.75%.
In a statement the central bank inferred that it believes Turkey’s core inflation rate will continue to cool. It stated; ‘Yet, a more persistent reduction in inflation necessitates a cautious approach in monetary policy. Taking into account the elevated volatility in food and energy prices, the Committee decided to cut the interest rates at a measured scale.’
In the wake of the announcement the Lira initially rallied against the US Dollar before paring gains to trade around the day’s opening levels.
The Lira was trading in a slightly stronger position against the Pound.
In the hours ahead, the Lira could advance on the US Dollar if Federal Reserve Chairwoman Janet Yellen adopts a cautious tone during her testimony to the senate.
Given that this week’s US inflation data is expected to show a marked slowing in the pace of consumer price gains, it is possible that the central bank chief will hint at domestic borrowing costs remaining lower for longer.
If that proves to be the case, the US Dollar could drift lower against higher-risk and emerging market assets.
Friday could see the Lira experience additional volatility as Turkey publishes its trade balance figures. The nation’s deficit is forecast to have narrowed from 8.51 billion US Dollars to 8.34 billion US Dollars in January.
During the European session the US Dollar to Turkish Lira (USD/TRY) exchange rate was trading in the region of 2.4746.