Turkish Central Bank surprises with a large rate hike! Turkish lira surges, but the buying spree doesn’t continue!?
TCMB (Central Bank of Turkey) hasimplemented a rate hike that surpassed market expectations! Up until now, the TCMB has continually failed to meet rate hike expectations, but this time they finally delivered a substantial rate increase.
The central bank, aiming to defend a declining currency, and President Erdogan, who wants to cut rates to stop the economic downturn. Previously, rate hikes were blocked by Erdogan’s pressure, causing the Turkish lira to be sold off and triggering the Turkish Shock.
↓↓↓ Please see below for information on the Turkish Shock ↓↓↓
Turkish Lira Crash! Turkish Shock of August 10, 2018 – Summary
Continuation: Turkish Shock summary. A Turkish problem that goes beyond Turkey!
USD/TRY Daily Chart
As mentioned in the above Turkish Shock articles,President Erdogan’s autocratic actions seem to be contributing to the selling of the Turkish lira. It felt as if the central bank could not maintain independence under presidential pressure. Before the financial policy announcement this time, hopes were raised by statements from Treasury Minister Albayrak such as “The Turkish central bank will do anything. The Turkish central bank is independent.” With Erdogan’s statements not appearing, there was a sense that, this time, perhaps...
↓↓↓ Look at the outlook before the announcement in the article below ↓↓↓
Surprising News and TCMB Policy Rate Forecast!
As mentioned in the above article,President Erdogan is steadily moving towards an autocratic regime. There was already concern about the expanding autocratic system, and finallyone hour before the monetary policy announcement, Erdogan began pressing for a rate cut. He stated phrases like “High interest rates cause inflation,” “The central bank does not accurately forecast inflation,” “Inflation is the result of the central bank’s incorrect responses,” and “Interest rates should be lowered,” which led to a dollar selling trend as shown in the chart below. This suggested thatthey might not raise rates after all, but when the time came, there was a substantial rate hike.Surprise rate hike!!
USD/TRY 1-minute chart
Hold steady to 3% rate hike → negative
3% to 5% rate hike → within expectations
5% to 7% rate hike → positive
That was roughly the range.
Result is,a 6.25% rate hike!
Raised the 1-week repo rate to 24.0%.
An unexpected positive surprise! With a large rate hike, the Turkish lira surged. However,the lira did not continue to rise as much as the surprise suggested. From my personal view,the surprise was undeniable but not entirely unexpected, which may be one reason. Also, the primary factor isif such a large rate hike can be done, then had they done it at the prior policy announcement, it would have been effective, but since it was a last-minute tightening,questions about the sustainability of rate hikes remain.I will continue to watch President Erdogan, Treasury Minister Albayrak, and the TCMB’s movements going forward.
