The USD/TRY spiked on Thursday after the Central Bank of the Republic of Turkey (CBRT) did the unthinkable. The pair rose to a high of 8.800, which was the highest level since June this year.
CBRT does the unthinkable
The CBRT concluded its two-day monetary policy meeting and surprised the market. At a time when Turkey is going through an inflationary phase, the bank decided to lower interest rates by a whopping 100 basis points.
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Precisely, the bank decided to lower interest rates from 19% to 18%. It also lowered the overnight borrowing and lending rates by 100 basis points to 16.50% and 18.50%, respectively. This decision caught the market by surprise because most analysts were expecting the bank to hold rates steady.
In the statement, Governor Sahap Kavcioglu cited several reasons behind the rate cuts. First, he cited leading economic numbers which have showed that the economy gathered momentum in the third quarter, Second, he argued that higher interest rates were starting to hinder this growth.
Third, the governor noted that the current inflation pressure has been driven primarily by supply-side factors like supply-side constraints. He said:
“It is assessed that these effects are due to transitory factors. On the other hand, the decelerating impact of the monetary tightening on credit and domestic demand is being observed. The tightness in monetary stance has started to have a higher than envisaged contractionary effect on commercial loans.”
The CBRT decision was unthinkable because most economists believe that lower interest rates lead to higher inflation. In Turkey’s case, lower rates at a time when the Fed is a bit hawkish will devalue the Turkish lira. This, in turn, will lead to higher import prices and higher costs. Indeed, the USD/TRY had one of its best days since March.
Still, Sahap’s decision was likely aimed at Recep Erdogan, who has long talked about the need to lower interest rates.
USD/TRY technical analysis
The USD/TRY pair rose sharply after the latest CBRT decision. It is now hovering near its all-time high. Along the way, the pair remains above the 25-day and 50-day moving averages on the daily chart. It is also above the ascending black trendline.
Therefore, there is a likelihood that the pair will maintain the bullish trend as a divergence between the Fed and CBRT emerges.
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