USD/TRY touched record high levels at 8.9027 after the unexpected rate cut by the Central Bank of the Republic of Turkey on Friday, September 25, 2021.
The USD/TRY was trading at 8.28 levels at the beginning of September. But by the end of the month, it saw a sharp upmove to 8.90 levels. It was a massive surge of 6.9% in September.
The US Dollar against the Lira found resistance at the 8.9 level. If the USD/TRY continues its upmove, it may test 9.10 levels soon.
Central Bank Governor of Turkey Lowers Interest Rates
The central bank of Turkey cuts benchmark interest rate in September. Lira becomes the worst-performing currency in the emerging markets as the USD/TRY currency pair surges in the foreign exchange market. The weakening US Dollar is, however, supporting the performance of the Lira.
The Lira rapidly declined against the US Dollar on the slash in interest rates as it slid to 0.1125 levels last week. The central bankâ€™s decision to ease monetary policy on Thursday was unexpected. It brought almost a drop of 3% in the Lira.
Interest rates cuts are at 18%. Inflation in Turkey is accelerating, and costs are increasing, but the central bank has cut down interest rates from 19% to 18%. With lower interest rates, inflation threatens the Turkish economy. Transitory factors are driving inflation higher, says Kavcioglu. However, rising costs are a burden on the people, and household buying has become expensive.
Sahap Kavcioglu took over as the governor of the central bank in March 2021. The central bank is taking steps to tackle inflation, says the governor. His move to slash rates comes at the insistence of President Erdogan to bring down policy rates. Despite high inflation, the governor has slashed down interest rates, surprising investors in the forex market.
Lira Hurt by President Erdoganâ€™s Policy on Lower Interest Rates
President Recep Tayyip Erdogan believes that lower interest rates will bring down inflation. Earlier, three central bank governors had to step down for hiking interest rates. They had displeased the President by going against his policy of lower interest rates.
Erdogan promises slow inflation with cheaper borrowing costs by asking the central bank to lower interest rates.
Lira has come down by almost two-thirds of its value in five years. The financial crisis in 2008, the pandemic in 2020, and the exit of three central bank governors in two years have hit the value of the Lira. The Turks facing double-digit inflation are the worst hit.
Rising Inflation Adds Pressure to the Lira
Within two years, three top bank officials had to quit for not slashing interest rates, and the banking sector faced disruptions from the constant dislocation of top officials. On each occasion, the value of the Lira slid several points.
In August, inflation in the country was at 19.25%. In July it was at 18.99%. Rising inflation is not good for the economy, say economists. Core inflation will receive priority, says the governor. He promises to bring down inflation.
However, analysts do not support this approach. Foreign investors do not show interest in the volatile Lira in the forex market. The Turkish Lira will test new lows say, analysts.
Investors are moving out of the Lira into other safe-haven currencies outside Turkey. It will set inflation higher, predict analysts. Capital is moving out of Turkey on the monetary policy to bring down rates. President Erdoganâ€™s aversion to high interest rates drives rates lower.
Funds are flowing out of the bond markets, weakening the Lira further, as foreign investors are selling their investments in the Lira.
Foreign investors hold only 5% of government bonds. Earlier, they had almost 25% of the bonds. But the weakening Lira and the government stance to lower interest rates despite high inflation is driving foreign investors away.
Government Supportive Measures Ending in Turkey
Unemployment was at 12.0% in July. In June it was at 10.6%. The government wage support which upheld the economy during the pandemic has come to an end. To protect the economy, the government brought a ban on layoffs during the pandemic lockdown. With government support coming to an end in July, the economy is going downhill, especially with high inflation.
The jobless rate peaked in July 2020 at 14.4%. In May 2021, when covid cases surged to a record high, there was a total lockdown. But with the easing of restrictions, tourism and restaurants show signs of improvement.
Turkey’s GDP shows record growth in the second quarter of 2021. The massive economic growth of 21.7% for the quarter ended June 2021, despite inflation and unemployment, is good news for the economy. The service sector shows good performance in the second quarter.
Industrial growth was at 40.5%, followed by the information and communicator sector at 25.3%. The real-estate and agricultural sectors have been laggards that slowed down growth in the economy.
The US Dollar, which was finding resistance at the 93.50 levels, has pierced through the resistance. It is trading at 93.79 levels during trading hours on September 28, 2021.