Pound Turkish Lira (GBP/TRY) Exchange Rate Plunges after Turkey Raises Interest Rates

Pound Turkish Lira (GBP/TRY) Exchange Rate Plummets as CBRT Surprises with Hawkish Hike

(Updated 13:25, 24/08/23) The Pound Turkish Lira (GBP/TRY) exchange rate came tumbling down this afternoon after the Central Bank of the Republic of Türkiye (CBRT) raised interest rates more than anticipated.

The CBRT hiked rates by 750bps, three times more than the expected 250bps. This brought Turkey’s benchmark repo rate up from 17.5% to 25%, a near two-decade high, rather than the anticipated 20%.

The Turkish Lira (TRY) surged higher following the decision, with markets surprised by the CBRT’s hawkishness. Although Turkey has vowed a return to more orthodox economic policies since the re-election of President Recep Tayyip Erdoğan, who slashed interest rates despite rampant inflation, the central bank had repeatedly disappointed investors at previous meetings. Today’s decision caught investors off-guard, catapulting the Lira higher.

Meanwhile, the Pound (GBP) may still be facing headwinds after yesterday’s dire PMI results. British business activity unexpectedly contracted this month, raising fears of a recession and denting Bank of England (BoE) rate hike bets. Sterling slumped in response.

New data today from the Confederation of British Industry (CBI) added to the downside. According to the CBI’s distributive trades survey, UK sales in August slumped at their swiftest pace in over two years.

At the time of writing, the GBP/TRY exchange rate is trading around ₺33.2725. This is a 3.5% decline on the day and the pairing’s lowest level since early July. More losses could be on the cards as the session unfolds.

Original article continues below:

Pound Turkish Lira (GBP/TRY) Exchange Rate Climbs as Turkey Continues Policy U-Turn

The Pound Turkish Lira (GBP/TRY) exchange rate rose to its highest levels since late July this morning, as Turkey begins unwinding one of the schemes it used to shore up the Turkish Lira (TRY). Coming up, all eyes are on the Central Bank of the Republic of Türkiye’s (CBRT) interest rate decision on Thursday.

At the time of writing, GBP/TRY is trading at around ₺34.7427, up almost 0.3% on the day and over 1% on the week.

Turkish Lira (TRY) Slips as CBRT Unwinds Lira Scheme

The Lira is facing renewed selling pressure today as Turkey begins rolling back policies protecting the country’s currency from depreciation.

As part of President Recep Tayyip Erdoğan’s previous unorthodox approach to economic policy, the Turkish government staged interventions to artificially prop up the value of the Lira. After the policy U-turn ushered in by Erdoğan’s re-election, Ankara is now unwinding these measures.

On Sunday, the CBRT started reversing a costly scheme that protected Lira deposits from foreign exchange depreciation.

The scheme, known as KKM, was one of the measures used to prevent the Lira from collapsing. Now that it is being unwound, there are worries the Lira could fall further.

In addition, many banks sounded the alarm over the new proposals, warning that they could hit banking sector profits.

These factors seem to be weighing on the Lira during this week’s session, putting it under pressure once again. TRY hit an all-time low towards the end of July but since then had seemed to stabilise, clawing back some losses. This week, it is weakening once again.

Pound (GBP) Underpinned by BoE Bets

Meanwhile, the Pound (GBP) has found support as markets bet on more Bank of England (BoE) rate hikes following last week’s data releases.

UK wage growth unexpectedly accelerated to a record high in the second quarter of this year, while July’s consumer price index pointed to unexpectedly sticky core inflation. These two data releases boosted expectations that the BoE will push ahead with more policy tightening.

While rate hike expectations are underpinning the Pound, a lack of British data this week may be limiting Sterling’s gains. GBP investors are likely looking ahead to more impactful reports due out on Wednesday morning.

GBP/TRY Exchange Rate Forecast: CBRT to Disappoint TRY Investors?

Looking ahead, the CBRT interest rate decision on Thursday is the focus for TRY investors this week.

The current consensus is that the central bank will raise interest rates from 17.5% to 20%. While such a move would raise interest rates to their highest levels in four years, many analysts believe it would not be high enough.

Investors have been consistently disappointed by smaller-than-expected rate hikes from the CBRT. Most economists agree that in order to see a dramatic improvement in Turkey’s current inflation crisis, the central bank needs to take much more drastic action.

Instead, it seems as though the CBRT is limited in the action it can take.

If we see another restrained rate hike from the central bank, the Lira could start slipping towards the all-time low hit one month ago against the Pound.

Before then, the UK’s latest PMI results are due out. To be published on Wednesday, the latest surveys are expected to show that private sector activity slowed for the fourth consecutive month in August, crawling to a near stop. Such results could dent GBP.

Samuel Birnie

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