The Turkish Lira strengthened for a second consecutive session on Tuesday after the Turkish central bank defied President Recep Erdogan and left interest rates unchanged at 7.5%. The move eased some of the pressure on the currency as the markets saw it as the central bank flexing its muscles and proving its independence from the influence of the government.
Concerns that the bank could lose its freedom were heightened as the political storm over monetary policy resulted in president Erdogan launching public attacks on the bank and its governor. Erdogan has complained that interest rates should be aggressively cut in order to spur-on economic growth. Over the past few weeks the Lira has repeatedly touched record lows as the increasingly tense standoff between the central bank and government escalated. This week however Erdogan appears to have backed down after having a meeting with bank governor Erdem Basci.
Turkish interest rates have been cut five times since January 2014 as the central bank sought to shore up the currency following record declines against the US Dollar.
The Turkish central bank is set to remain under pressure over the coming months as Ali Babacan, the Turkish deputy prime minister for the economy, said that the nation’s economy grew less than 3% in 2014. Unemployment also increased to a four high of 10.9% in the final quarter of last year.
‘Today’s decision will provide the Lira with a much-needed respite. If the government refrains from criticising today’s decision and the US Federal Reserve is not hawkish enough to justify expectations for an interest rate hike in June, the Lira could rally strongly,’ said an economist.
Against the Pound Sterling, the Lira surged by more than 1% as the UK currency came under pressure from concerns over the outcome of the May 7 general election. According to a Bloomberg poll, 48% of economists surveyed listed political uncertainty as the biggest threat to the UK’s economic recovery.
The Pound could regain some ground on Wednesday if the latest UK unemployment and average earnings data comes in positively. The jobless rate is expected to remain steady at 5.7% whilst average earnings including bonuses are forecast to rise from 2.1% to 2.2%. Earnings without bonuses are expected to improve from 1.7% to 1.8%. Also due for publication will be the minutes of the Bank of England’s March policy meeting which could offer clues as to when a rate hike is likely.
The Pound Sterling to Turkish Lira was trading in the region of 3.8498 on Tuesday.