Pound Turkish Lira (GBP/TRY) Exchange Rate Strikes Fresh Record High amid Central Bank Decisions
(Updated 16:50, 22/06/23) The Pound Turkish Lira (GBP/TRY) exchange rate surged to a fresh all-time high today after the Central Bank of the Republic of Türkiye (CBRT) disappointed investors by delivering a smaller-than-expected interest rate rise.
Although the CBRT delivered a huge rate hike, lifting rates from 8.5% to 15% after a two-year freeze, this was far below forecasts of a rise to 21%.
Economists think such a hike is insufficient to bring down inflation in Turkey. The official inflation rate in Turkey is 39.59%, but unofficial estimates from the Turkish Inflation Research Group put it at 110%.
‘Today’s decision is insufficient’, said Selva Demiralp, Professor of Economics at Koç University in Istanbul, adding: ‘This is because the real policy rate is still significantly negative even after today’s rate hike.’
The decision sent the Turkish Lira (TRY) tumbling to new record lows, which in turn is likely to further exacerbate inflationary pressures, thereby adding to Turkey’s current economic crisis.
Meanwhile, the Bank of England (BoE) raised interest rates by 50bps at its policy meeting, from 4.5% to 5%. This was higher than the expected 25bps rise and lent Sterling some support.
However, there are concerns that the BoE will choke the UK economy into a recession as it tightens monetary policy in an attempt to tame inflation. These fears may have capped GBP/TRY’s gains.
At the time of writing, GBP/TRY is trading at ₺31.5202, its highest level on record and 4.75% up on the day.
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Pound Turkish Lira (GBP/TRY) Exchange Rate Hits Ceiling Ahead of Central Bank Decisions
The Pound Turkish Lira (GBP/TRY) exchange rate is retreating from the fresh record high hit last week as traders tentatively await the interest rate decisions from both the British and Turkish central banks.
At the time of writing, GBP/TRY is trading at around ₺30.1093, down 0.9% from the all-time high hit at the end of last week.
Turkish Lira (TRY) Bounces as Markets Anticipate Huge Rate Hike
The Turkish Lira (TRY) seemed to hit a floor earlier this week, as anticipation of a hefty interest rate rise from the Central Bank of the Republic of Türkiye (CBRT) seems to have temporarily stemmed the selloff.
The Lira has been in freefall since President Recep Tayyip Erdoğan’s reelection in late May, as markets feared that Turkey’s economic crisis would worsen.
Since then, Erdoğan has signalled a return to economic orthodoxy. His appointment of market-friendly Mehmet Şimşek as economy minister and renowned financier Hafize Gaye Erkan as CBRT Governor are seen as steps towards stabilising the country’s fiscal and monetary policy approaches.
However, this change in direction means unwinding interventionist policies that have propped up the Lira, causing the currency to spiral towards its ‘real’ market value.
This week, markets hit pause on the TRY selloff, with the Lira clawing back some of its losses.
Investors are waiting for the CBRT interest rate decision on Thursday – the first major event Erkan will oversee as Governor and a test of Erdoğan’s new policy approach.
Markets expect a mammoth interest rate rise of 1150bps, from 8.5% currently to 20%, as the CBRT starts on the long, painful road to taming inflation and restoring stability. Some analysts believe an even bigger move is possible, with JPMorgan saying a rise to 25% is ‘on the table’.
The prospect of such a huge interest rate rise has temporarily put a floor underneath the Lira.
Pound (GBP) Softens amid Trader Caution Ahead of UK Inflation
Meanwhile, the Pound (GBP) has softened today amid thin trading conditions ahead of UK inflation and the Bank of England (BoE) interest rate decision.
GBP investors are seemingly hesitant to place any aggressive bets as they await these high-impact events.
While UK inflation is forecast to remain stubbornly high, and the BoE is likely to sound decidedly hawkish, traders are nevertheless hesitant. Cooler-than-expected inflation data could lead to a dramatic repricing of BoE rate hike bets. As a result, investors are preferring to wait on the sidelines today.
GBP/TRY Exchange Rate Forecast: Central Bank Decisions to Drive Volatility?
Looking ahead, we could see volatility in the Pound Lira exchange rate over the coming days as markets anticipate and respond to the central bank decisions.
First up we have the UK consumer price index on Wednesday. Economists expect headline inflation to ease from 8.7% to 8.4% and core inflation to hold at a 31-year high of 6.8%. Such results would cement bets on a hawkish policy announcement from the BoE, which in turn would likely support Sterling.
However, if inflation unexpectedly shows signs of easing then GBP/TRY could stumble.
Thursday then brings the interest rate decisions from the CBRT and the BoE. While a 25bps hike from the BoE, paired with hints of more rises to come, could underpin the Pound, most movement may come from the Lira.
A huge interest rate rise from the CBRT could see TRY spike. However, the Lira may not be able to sustain its gains. While the consensus among experts is that the Turkish central bank must raise rates in order to guide the country out of its current inflation crisis, there are caveats.
Such a large leap in interest rates could have negative consequences for people and businesses in Turkey, and the hike will take around 18 months to fully feed through into the economy. The road out of Turkey’s economic crisis is long and rife with risks. Any temporary rise in the Lira could quickly be reversed or capped.