GBP/TRY Exchange Rate Slides after Bold Turkish Central Bank Interest Rate Hike
UPDATE: The Pound Sterling Turkish Lira (GBP/TRY) exchange rate has fallen by -2.3% in the wake of what has proven to be a historic Turkish central bank (TCMB) interest rate decision.
The TCMB has defied President Erdogan’s calls to cut interest rates and raised them from 17.75% to 24%, above the anticipated 22% level.
This has pushed the Pound down to an interbank exchange rate of TRY8.08; it should be stressed that the situation remains highly volatile at present.
The move has triggered a surge in demand for the Lira, but just how the President – who had earlier in the day criticised the TCMB – will respond to the central bank action is yet to be seen.
High Tensions before TCMB Interest Rate Decision Cause Pound Sterling to Turkish Lira Exchange Rate to Jump Erratically
The Turkish Lira (TRY) has crashed further against the Pound (GBP) today ahead of a potentially historic Turkish interest rate hike – this has pushed Pound Sterling up by around 3.00% to an interbank exchange rate of TRY8.53, although it is still fluctuating wildly at the time of writing.
The Turkish central bank (TCMB) might cause a rapid reversal of the Lira’s fortunes when it makes its monthly interest rate decision at noon today. Currently economists are pencilling in a rise from 17.75% to 22%.
Controversy surrounds the move, however, amidst fears that Turkey’s President Erdogan – an avowed ‘enemy of interest rates’ – could put pressure on the bank to keep rates on hold. With that in mind, commentators are calling today’s monetary policy decision a ‘test of independence’ for the central bank.
Background to the Crisis
For a bit of background, Turkey is in the grips of a currency crisis that began in early August when the value of the Turkish Lira took a nosedive.
At 17.9%, Turkish inflation rates are currently at their highest level since 2004; this has been seen as a call to action from the TCMB.
Under normal circumstances, the TCMB would raise interest rates to support the currency and drive inflation down. Bucking the trend, however, the TCMB has left interest rates unchanged sparking fears of political meddling.
Turkish President Recep Tayyip Erdogan factors into proceedings, as some suspect that his authority and opposition to higher interest rates has been overriding TCMB decisions.
Despite this potential opposition, the TCMB is still expected to hike interest rates from 17.75% to 22% today – this might not cause a complete Lira recovery, but could still boost the TRY/GBP exchange rate.
Moody’s Warning of No-Deal Brexit Recession Fails to Dent GBP/TRY Exchange Rate
On the other side of the pairing, an alarming forecast about the UK economy after a no-deal Brexit has failed to hold back the Pound’s (GBP) rise against the Turkish Lira (TRY) today, despite its negative implications.
Analysts at credit ratings agency Moody’s have cautioned that if the UK left the EU without a solid Brexit deal then:
‘The immediate impact would likely be seen first in a sharp fall in the value of the Pound, leading to temporarily higher inflation and a squeeze on real wages over the … years following Brexit.
‘This in turn would weigh on consumer spending and depress growth, with a risk of the UK entering recession.’
Today’s Pound to Lira Exchange Rate Forecast: High Volatility ahead on TCMB and BoE Interest Rate Decisions
Both the UK and Turkey will be holding central bank meetings today, but the TCMB’s rate decision is the more significant of the two by far.
If TCMB officials press ahead with the predicted interest rate hike to 22% then the Turkish Lira (TRY) could recover somewhat against the Pound (GBP) on hopes for a stabilisation of the turbulent Turkish financial situation.
This is by no means a guaranteed outcome – President Erdogan has recently put pressure on the TCMB not to act by declaring:
‘Tough times call for tough measures. We should cut this high interest rate.’
Less dramatically, the Bank of England (BoE) isn’t expected to touch interest rates today but could still raise GBP trader confidence if policymakers hint at a 2019 interest rate hike.