The Turkish lira is retesting $7 against its US peer on Thursday after the central bank held off on raising interest rates. While officials had not anticipated a rate hike, financial markets would not have been upset if Ankara pulled the trigger on additional tightening to rein in inflation. Disappointing economic and monetary data weighed on the lira.
The Central Bank of Turkey left its benchmark one-week repo rate at 17% during its February policy meeting. Officials noted that they would sustain their monetary tightening position to take into account its end-of-2021 forecast target.
According to a statement from the central bank, policymakers added that they would keep the door open to additional policy tightening until they saw a permanent downward trend in inflation. They further noted that the exchange rate and increasing commodity prices might also push the institution to slash rates.
Overall, the central bank is confident that economic activity is rebounding, despite uncertainties surrounding the global economic recovery.
Economists say that Governor Naci Agbal could survive by keeping rates unchanged, despite the lira’s depreciation and expanded credit growth. Since the institution dramatically raised rates in a short period of time, Agbal purchased some time before enacting further tightening.
Morgan Stanley analysts wrote in a research note:
“Even though market-implied pricing shows around a 30 basis points hike at the February meeting, a hawkish hold would be in line with how investors are positioned.”
Foreign exchange reserves came in at $53.72 billion in the week ending February 12, down from $54.37 billion in the previous week. This represented the fourth consecutive week that gross forex reserves have topped $50 billion.
In other economic data, consumer confidence edged up to 84.5 in February, up from 83.3 in January. Automobile production slumped 3.3% year-over-year in January, down from the 10.2% gain in December.
The USD/TRY currency pair rose 0.28% to 6.9932, from an opening of 6.7922, at 17:18 GMT on Thursday. The EUR/TRY advanced 0.61% to 8.4482, from an opening of 8.3934.