The central bank of Türkiye led by the new governor Hafiz Gaye Erkan raised rates for the first time since late 2021, but the Turkish lira continues to capitulate, sinking to new low ever.
The lira fell to be precise in today’s session up to 25.74 against the US dollarcarrying its YTD loss, or year-to-date, a -27,3%.
In yesterday’s day, the central bank of Türkiye announced a monstrous rate hike, equal to +650 basis points.
The rates were almost doubled, from the previous 8.5% to 15%.
However, despite the clear about-face of the institution’s monetary policy, for years hostage to the decisions of President Recep Tayyip Erdoganthe point is that the markets had been betting on an even more significant monetary tightening, due to an inflation rate that remains at around 40%, even if halved from the record 85% tested at the end of 2022.
In the background, the fear remains that, from one moment to the next, Erdogan, known to support expansionary monetary policy even in the face of galloping inflationcan go back to giving orders to the central bank, as it has done several times in the past, launching real purges with which it defenestrated who dared to contradict his concepts of inflation and interest rates.
It must also be said that real interest rates remain deeply negative and that the interest rate raised by the central bank to 15% remains well below the rates on bank deposits which, in some cases, reach the 40% threshold.
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The reassurances of the central bank against galloping inflation
For its part, the central bank headed by Hafize Gaye Erkan announced, after the first meeting chaired by the new governor and in announcing the maxi monetary tightening, that she will go further in her fight against inflation in Turkey, “in a timely and gradual manner”.
Similar statements by the new finance minister Mehmet Simsek, which reported that “the path to price stability will be gradual but steady”.
Not only Turkish lira: watch out for credit default swaps
The suspicion that Erdogan may once again interfere in central bank decisions continues to depress the Turkish lira which, only in today’s session, following the monetary tightening announced yesterday, has it left on the ground about 8.5%.
According to the markets, the collapse of the currency would not be even close to the end, considering that, according to the reports a Reuters article, forward contracts discount a further drop of the lira to 33 against the US dollar, over the next year, compared to 30 against the US dollar priced before the announcement of monetary tightening.
Interviewed by Reuters, a source close to the central bank explained the monetary tightening as less aggressive than expected – analysts had forecast a rate hike of up to 21% – with the need to lock down the banking sector, and therefore to proceed gradually to prevent a sudden spike in volatility.
In addition to the new record low tested by the Turkish lira, also pay attention to credit default swaps (cds), i.e. contracts to insure against the risk of a government bond default, which, according to data from S&P Global Market Intelligence, rose today for the second consecutive session, up to 518 basis points, to a level nearly 50 basis points higher compared to last Friday’s close.