Pound Turkish Lira (GBP/TRY) Exchange Rate Weakens following Turkish Interest Rate Decision?

Pound Turkish Lira (GBP/TRY) Exchange Rate Falls despite Smaller-than-Expected Rate Rise

(Updated 15:10, 20/07/23) The Pound Turkish Lira (GBP/TRY) exchange rate stumbled today, despite a smaller-than-forecast rate hike from the Central Bank of the Republic of Türkiye (CBRT).

The CBRT raised interest rates from 15% to 17.5%, lower than market forecasts of 20%. However, investors in the Turkish Lira (TRY) seemed unfazed by the below-forecast hike, perhaps due to rumours that the central bank was going to opt for an smaller increase.

Some commentators have criticised the move, arguing that it undermines repeated assertions that the bank is prepared to do what is necessary to tackle sky-high inflation.

Timothy Ash, Emerging Market Strategist at BlueBay Asset Management, commented:

‘Terrible decision and I think a mistake. Again under-delivering… It will again play to the script of those saying that Simsek and Erkan don’t really have a mandate to deliver real policy tightening’.

Mehment Simsek and Hafize Gaye Erkan are Turkey’s finance minister and the CBRT Governor, respectively.

Nevertheless, the Lira was able to gain ground against a weakening Pound (GBP). The UK currency is still reeling from Wednesday’s cooler-than-forecast consumer price index.

At the time of writing, GBP/TRY is trading at ₺34.5577, down 0.4% on the day but still up 2% on the week.

Looking ahead, there is the potential for a delayed response as disappointment over the CBRT’s decision sinks in. In the coming weeks, the Lira could be heading back towards record lows.

In the meantime, UK retail sales could impact the Pound on Friday. Forecasters expect sales growth to have printed at 0.2% in June – a positive reading but a slowdown from May’s 0.3% growth. Could signs of resilient consumer demand lift Sterling? Or will a slowdown in sales dent GBP exchange rates?

Original article continues below:

Pound Turkish Lira (GBP/TRY) Exchange Rate Muted Ahead of CBRT Policy Meeting

The Pound Turkish Lira (GBP/TRY) exchange rate is muted today as markets await the latest interest rate decision from the Central Bank of the Republic of Türkiye (CBRT) and the recent fall in UK inflation continues to pressure Sterling.

At the time of writing, GBP/TRY at ₺34.7821, having fluctuated sideways through most of today’s trade.

Turkish Lira (TRY) Subdued as Markets Await Rate Decision

The Turkish Lira (TRY) is subdued today as investors refrain from placing aggressive bets ahead of the CBRT policy meeting.

The Lira had hit a fresh record low earlier this week, with GBP/TRY rocketing to ₺35.3707, amid rumours that the Turkish central bank would raise rates less than anticipated at today’s meeting. At last month’s meeting, the CBRT delivered a smaller-than-expected rate rise, which saw TRY strike fresh lows.

Turkey has seen a sharp about-turn in monetary policy since President Recep Tayyip Erdoğan’s reelection earlier this year. Erdoğan had used state intervention to keep interest rates relatively low in the face of rampant inflation, but has now pushed forward with plans to take a more orthodox approach to economics.

However, many analysts believe the shift to increasing interest rates has been too soft and too slow.

As the CBRT meeting draws nearer, TRY is on the defensive. The Lira has edged back down towards record lows against the US Dollar (USD) and is wavering sideways against the Pound (GBP).

Pound (GBP) Remains Pressured by Cooler UK Inflation

Turning to the UK currency, Sterling is also on the back foot today as yesterday’s softer consumer price index continues to create headwinds.

The CPI report showed that British headline inflation cooled more than forecast in June, decelerating from 8.7% to 7.9%. Meanwhile, core inflation unexpectedly eased from 7.1% to 6.9%.

After the release, markets scaled back their expectations for more Bank of England (BoE) rate hikes. Investors now anticipate a 25bps increase at the BoE’s August meeting, rather than a 50bps move. They also believe that Bank Rate will peak below 6%.

This saw the Pound slump yesterday, with the UK currency licking its wounds during today’s session.

GBP/TRY Exchange Rate Forecast: CBRT Decision to See Lira Strike New Lows?

Looking forward, the CBRT interest rate decision is the focus for the GBP/TRY exchange rate.

Markets anticipate a 500bps hike, lifting Turkish interest rates from 15% to 20%. However, as mentioned there are rumours that the central bank will not hike as aggressively as this.

Abdulkadir Selvi, a prominent columnist at major Turkish newspaper Hürriyet, wrote earlier in the week that estimates among ‘economic circles’ were that rates would go up to around 17%. This was one of the news pieces that sparked the Lira’s selloff on Tuesday.

If the Turkish central bank does once again disappoint markets with a smaller-than-expected interest rate rise, we could see GBP/TRY regain the upside and perhaps hit a fresh record high.

However, if the CBRT presses ahead with a more hawkish hike to 20%, the Lira could strengthen against the Pound.

Samuel Birnie

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