Turkish lira rises after mention of FX rate in CBRT statement

The Central bank of Turkey adhered to its pledge at its last meeting and held the policy rate on hold at 14.00% today – as expected by all of the analysts surveyed by Bloomberg.

While the decision had been well-signalled in advance, the Turkish lira still reacted positively to the announcement, as it took some pressure off of investors’ shoulders after the aggressive easing cycle seen over the last year.

The rally in the lira also came as the CBRT referenced the lira in its statement today.

The addition of the phrase around prioritising the exchange rate suggests to markets that the central bank is finally admitting to having an FX target, which is welcomed in Turkish assets along with the regulatory measures that have been announced recently.

“While cumulative impact of the recent policy decisions is being monitored, to create a foundation for sustainable price stability, the comprehensive review of the policy framework is being conducted with the aim of prioritizing Turkish lira in all policy tools of the CBRT.” – CBRT statement

Looking ahead, the path to gaining back investors’ confidence will be a tricky one for the CBRT to tackle, especially as the CBRT has transitioned to their “new economic model” that implements low interest rate policy in an effort to keep inflation down – something that contrasts starkly with most economic theory.

With inflation expected to rise further in the months ahead, this poses a risk to the lira outlook. However, the monitoring of the exchange rate along with the recently announced regulatory measures may serve as some form of support in the meantime.

USDTRY falls as lira traders find support in today’s CBRT decision despite the mention of the “new economic model”, which signals lower rates in the future

Author: Ima Sammani, FX Market Analyst

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