Turkish Lira Meltdown Pushes GBP/TRY to Record Highs

Pound Turkish Lira (GBP/TRY) Surges as CBRT Slashes Rates Again

After giving up some of yesterday’s gains early on Friday morning, the Pound Turkish Lira (GBP/TRY) exchange rate is fluctuating at the end of the week to trade at 14.9529, slightly up on the European session’s opening levels.

GBP/TRY rocketed on Thursday after the Central Bank of the Republic of Turkey (CBRT) slashed interest rates for the third time within three months.

The latest rate cut to 15% from 16% sent the GBP/TRY exchange rate surging over 3% to hit ₺15 before retreating slightly.

The Turkish Lira’s attempts to regain some of its losses during Friday’s session have since appeared to run out of momentum.

Turkish Lira (TRY) Collapse Threatens to Tumble to New Lows

After a brief attempt to stop the rout this morning, the Turkish Lira (TRY) is sliding back towards, and threatening to fall past, the record lows it sank to on Thursday.

The Turkish Lira spiralled into freefall towards the end of this week after the CBRT cut interest rates for the third time in as many months.

November’s cut takes the interest rate level down to 15% following a 2% cut in October, and a 1% drop in September, taking the interest rate from 19% to 15% in just three months.

Against the backdrop of eye-wateringly high consumer inflation of nearly 20%, TRY exchange rates fell to a record low.

Economists have since warned of inflation rising up to 30% as the risk rises of inflation and volatile TRY exchange rates spiralling out of control.

The combination of soaring inflation and a weaker currency that will drive import costs higher poses a serious threat to the Turkish economy.

Analysts have also warned of more financial stress for Turkey through a credit crunch and debt restructuring.

According to ratings firm Fitch, Turkey’s government and its companies need to refinance a combined $174.5 billion next year, which could become increasingly difficult.

More Interest Rate Cuts to Come?

Although the Turkish central bank said it would consider stopping rate cuts at its December, the CBRT appeared to hint at more rate cuts, saying:

“The Committee expects that the transitory effects of supply-side factors and other factors beyond monetary policy’s control on price increases will persist through the first half of 2022.

“The Committee will consider to complete the use of the limited room implied by these factors in December.”

Turkey’s President Recep Tayyip Erdoğan views high interest rates as the cause of inflation, unlike many major central banks who consider raising interest rates as a tool to combat rising inflation.

ThinkMarkets analyst Fawad Razaqzada commented:

“The market clearly doesn’t take the CBRT seriously anymore, as it has lost any little credibility it had. Erdogan is running the show. If he wants lower interest rates he will get lower rates, regardless of how high inflation might be or how the economy is doing. So, with the CBRT head saying the central bank will consider ending rate cuts in December, then he might as well consider a new job!”

The threat of renewed political uncertainty has also increased after the Turkish opposition leader called for elections.

Pound (GBP) Gains Slow as UK Retail Sales Return to Growth

The Pound (GBP) has broadly lacked support today after rallying through midweek trade despite UK retail sales returning to growth for the first time in six months in October with a reading of 0.8%.

The Pound’s gains have slowed after strengthening on better-than-expected UK job market data and a jump in inflation in October.

Falling UK unemployment to 4.3% in the three months to September, and a 160,000 rise of employees on company payrolls despite the end of the furlough scheme boosted UK recovery optimism.

Alongside UK inflation soaring to 4.2%, up from 3.1% in September, many investors repriced expectations for the Bank of England (BoE) to raise interest rates, boosting GBP exchange rates.

Unlike the Turkish central bank’s view of cutting interest rates to bring inflation down, markets are increasingly betting on the BoE to hike rates as a way of slowing inflation.

However, the Pound has lost momentum today amid uncertainty over which way BoE policymakers will vote at the Bank’s December meeting as factors such as energy and petrol prices, considered transitory, drive inflation and some signs of a tight UK job market remain.

The Pound is also coming under pressure from souring market sentiment as fears grow over renewed restrictions in Europe due to soaring coronavirus cases.

GBP/TRY Forecast: Turkish Lira on the Brink of Abyss?

After already gaining nearly 40% in 2021, GBP/TRY may extend its gains in the coming weeks as the CBRT likely continue coming under pressure from President Erdoğan to further slash interest rates.

With many economists considering higher interest rates the most effective way at combating rising inflation, the Turkish Lira may struggle to recover from its collapse.

Meanwhile, the Pound may experience swings as UK-EU talks continue over the Northern Ireland protocol and the possibility looms of the UK government activating Article 16 to suspend parts of the agreement and causing trade disruption with the Eurozone.

Andrew Roberts

Contact Andrew Roberts


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