USD/TRY Weakens After Turkey Slashes Interest Rates for Second Straight Month

The Turkish lira erased most of its losses against its US rival, despite the central bank cutting interest rates at a time when inflation is ravaging throughout the Eurasian economy. The lira has been one of the worst-performing currencies this year, as a currency crisis weighs on the country.

Central bank officials cut the benchmark interest rates by 100 basis points to 12% during the September policy meeting, down from 13% in August. This surprised the markets as they did not anticipate any further rate cuts after last month’s easing efforts.

The overnight lending rate declined from 14.5% in August to 13.5% in September, while the overnight borrowing rate also fell from 11.5% to 10.5%.

Market analysts slammed the decision, arguing that it is reckless at a time when inflation has surpassed 80% and energy prices have spiraled out of control.

Atilla Yeşilada, a prominent economic commentator, told the Financial Times that this decision suggested that Ankara had “gone off the rails.” But this has been par for course in Turkey for more than a year as President Recep Tayyip Erdogan believes that slashing interest rates to grow the economy would be the antidote to fighting inflation.

Selva Demiralp, a professor of economics at Istanbul’s Koç University, also told the newspaper that these moves are “not sustainable” in an inflationary environment.

“The rest of the world acknowledges that the costs of inflation on the economy are higher than the costs of reducing inflation,” she said. “But the Turkish central bank continues to remain detached from the rest of the world.”

In other economic data, the Turkish Statistical Institute’s (TSI) consumer confidence index (CCI) improved to 72.4 in September, up from 72.2 in August.

Moreover, the foreign exchange reserves rose more than $1 billion to $74.82 billion in the week ending September 16. This represented the sixth consecutive week that forex reserves have topped $70 billion.

The USD/TRY currency pair rose 0.16% to 18.3574, from an opening of 18.3285, at 19:56 GMT on Thursday. The EUR/TRY swelled 0.21% to 18.0563, from an opening of 18.0279.

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