GBP/TRY Retreats as Turkish Lira Rallies on New Erdogan Rescue Plan

Pound Turkish Lira (GBP/TRY) Exchange Rate Slides on Erdogan Policy Plan

The Pound Turkish Lira (GBP/TRY) exchange rate crashed back from record highs on Monday after Turkey President Tayyip Erdogan prompted a Turkish Lira rally by announcing new measures in an attempt to bolster the currency.

GBP/TRY plunged from above ₺24 yesterday afternoon to ₺17.0245 at the time of writing, near the pairing’s lowest level in a month.

The huge swing follows a series of interest rate cuts to 14% from 19% since September as Turkish inflation soars above 21%, which had pushed the GBP/TRY exchange rate sharply higher over the last couple of months.

Turkish Lira (TRY) Surges as Erdogan Announces TRY Support Measures

The Turkish Lira (TRY) rocketed at the start of this week after Turkish President Tayyip Erdogan announced emergency policies that would stem weakness in the currency.

The support measures include a programme to protect savings from fluctuations in the Turkish Lira, with the Turkish government covering the difference incurred due to unfavourable shifts in TRY exchange rates that exceed interest rates promised by banks.

The government’s promise would give higher returns on Turkish Lira deposits when exchange rates weaken on currency markets.

Erdogan said:

“From now on, none of our citizens will need to switch their deposits from the Turkish Lira to foreign currencies because of their concerns that exchange rate fluctuations might wipe out gains from interest payments.”

Other policy announcements included reducing tax on Turkish Lira investments to 0% from 10%, helping exporters mitigate foreign exchange risks amid heightened market volatility, and the government matching 30% of pension contributions by private sector workers.

The Turkish Lira had initially fallen to record lows at the start of Monday’s session after Erdogan had reiterated his policy stance to continue lowering interest rates despite soaring inflationary pressure.

His policy stance contrasts the view held by the majority of economists that raising interest rates serves to bring down inflation.

In addition, some analysts view the measures as a hidden rise in interest rates without the benefits of gaining interest on Turkish Lira deposits held in bank accounts.

Professor of Economics at Bilkent University in Ankara said:

“There has been an epic interest rate hike without calling it one.

“There will be a big burden on the budget when there is a sharp increase in the foreign-exchange rate. This kind of burden usually gets monetised, which means even higher foreign exchange and inflation rates.”

Pound (GBP) Pressured by Soaring UK Covid-19 Cases

The Pound (GBP) continues to be limited by Omicron variant fears, soaring UK Covid-19 daily infections, and the threat of tighter restrictions at the start of this week’s session despite making gains against some of its peers today.

Following the UK government’s emergency cabinet meeting on Monday, UK Covid rules remain unchanged but Prime Minister Boris Johnson ‘reserves the possibility of taking further action’.

The announcement to hold off introducing tighter restrictions appears to have given the Pound modest support on Tuesday, but the risk posed by soaring daily coronavirus cases lingers.

Sterling has also received some support from reports the UK Treasury may provide support for businesses that have suffered a drop-off in trade and booster vaccinations hitting the 1 million people-a-day target.

GBP/TRY Forecast: Will the Turkish Lira Sustain its Rally?

The Pound Turkish Lira exchange rate will likely remain volatile as investors continue to react to the new measures.

However the Turkish Lira’s relief rally may not last long. As President Erdogan sticks by his policy stance of lowering interest rates to curb consumer inflationary pressure, the Turkish Lira may come under pressure again.

Meanwhile, the Pound will likely continue suffering Omicron-induced volatility as the threat of tighter UK Covid restrictions looms.

At the same time, progress in UK-EU post-Brexit negotiations on the Northern Ireland protocol could also provide Sterling some support as new lead UK negotiator Liz Truss meets EU counterpart Maroš Šefčovič.

Andrew Roberts

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