The USD/TRY pair rallied to an all-time high on Thursday after the latest interest rate decision by the Central Bank of the Republic of Turkey (CBRT). The pair is trading at 11.08, which is the highest level it has been. The Turkish lira has collapsed by more than 30% this year and by more than 225% in the past 25 years.
Turkish lira under pressure
The USD/TRY pair surged to a multi-year high as investors watched the latest decision by the CBRT. In its decision, the bank decided to slash interest rates by another 100 basis points.
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It reduced the headline interest rate from 16% to 15%. In the same decision, the bank slashed the overnight lending and borrowing rates to 13.5% and 16.5%. This made the CBRT the world’s most dovish central bank.
The CBRT has adopted a relatively unorthodox monetary policy framework in the past few months. The bank has decided to slash interest rates at a time when inflation is surging. This is unlike what other central banks are doing or are considering doing.
For example, the South African Reserve Bank (SARB) decided to hike interest rates for the first time in two years. The Federal Reserve and the Bank of Canada (BOC) have started their tightening cycle while the Brazilian Central Bank has made several rate hikes.
The CBRT and President Erdogan believe that high-interest rates lead to high inflation. To a large extent, this is wrong since low-interest rates tend to devalue the currency. This, in turn, leads to a higher cost of imports, which lead to high inflation. Indeed, in the past few months, Turkish inflation has surged to almost 20%.
In its decision, the CBRT blamed other external factors like the supply chain disruptions for causing inflation. It also hinted that it was done cutting rates for now.
USD/TRY technical analysis
The daily chart shows that the USD/TRY pair has been in a relentless bull run in the past few weeks. Subsequently, the pair has risen above all moving averages while its Relative Strength Index (RSI) has jumped to the overbought level. Therefore, the pair will likely continue falling as investors lose confidence in the Turkish lira.
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