The Turkish lira is soaring against its US counterpart on Thursday as the currency received an injection from the central bank. Policymakers pulled the trigger on a rate hike during this month’s meeting as part of efforts to curtail the lira’s downward trend. Is the lira in store for another medium-term rally, or is it merely a shot in the arm?
At the March policy meeting, the central bank raised its benchmark one-week repo rate by 200 basis points to 19%. The move surprised markets since economists had anticipated at most a 100-basis-point hike. Officials had kept rates at 17% since the December meeting.
Turkey pulled the trigger on tightening because of upside risks from inflation forecasts, pricing models, and the medium-term economic and inflation outlook. Last month, the annual inflation climbed to 15.61%, up from 14.97% in January. This was the highest inflation reading since July 2019.
Ankara stated that the tapering of its aggressive monetary policy stance since the start of the coronavirus pandemic would be sustained until there has been a decline in inflation and prices stabilize. If monetary tightening is needed, the central bank will employ these measures, according to Governor Naci Agbal.
The MPC has decided to implement a front-loaded and strong additional monetary tightening.
The tight monetary policy stance will be maintained decisively, taking into account the end-2021 forecast target, for an extended period until strong indicators point to a permanent fall in inflation and price stability.
Jason Tuvey at Capital Economics told the Financial Times that the central bank is willing to highlight its “inflation-fighting credentials” and appease investor demands.
“Bringing inflation down on a sustained basis will require the central bank to break with the past and move slowly with monetary easing to keep real interest rates high for a prolonged period,” Turvey added.
Meanwhile, foreign exchange reserves came in at $52.66 billion in the week ending March 12. This is down from $53.25 billion in the previous week. This marked the ninth consecutive week that forex reserves have held above $50 billion.
In other economic data, automobile production contracted 9.3% year-over-year in February, down from -3.3% in January.
The Turkish lira had softened over the last month, sliding nearly 5%. Emerging market investors were disappointed after the last policy meeting that the Monetary Policy Committee refused to raise rates.
The USD/TRY currency pair plunged 2.69% to 7.3016, from an opening of 7.5059, at 17:17 GMT on Thursday. The EUR/TRY dropped 3.12% to 8.7072, from an opening of 8.9895.