The Turkish lira experienced a significant surge of over 7 percent against the dollar as a result of the Turkish Central Bank (TCMB)’s decision to increase interest rates, exceeding expectations. This decision marks a pivotal moment in Turkish President Recep Tayyip Erdogan’s unconventional economic policy.
Following the decision, the Turkish lira not only recovered from its losses but also continued to strengthen, experiencing a surge of over 7 percent against the dollar. As of 15:52 pm Istanbul time, the currency was trading at 25.48 against the dollar.
As the time of writing, the Turkish lira is trading at 26.33-26.4 against the dollar.
In its Thursday meeting conclusion, the Central Bank revealed a substantial increase in the interest rate by 750 basis points, reaching 25 percent specifically for repo buybacks over a one-week period. This marks the largest interest rate hike since 2018 and takes the interest level to its highest point since 2004.
According to a Reuters poll of economists, the expectation was for the TCMB to raise interest rates by 250 basis points, bringing it to 20 percent.
Price stability priority
The TCMB declared “recent indications of rising inflation.” It emphasized the need for a “gradual strengthening of monetary tightening policy” as necessary. This approach aims to achieve a notable improvement in inflation expectations.
Additionally, the TCMB emphasized the importance of “continuing monetary tightening measures.” These measures aim to swiftly decrease inflation, improve expectations, and maintain control over pricing behavior.
In response, Mehmet Şimşek, the Turkish minister of finance, expressed determination in a post on “X.” He stated, “We are resolute!” Furthermore, he emphasized that ensuring price stability remains their utmost priority.
Thursday’s interest rate announcement was well-received by the markets. Bank shares saw an increase, and the cost of Turkish debt insurance against a five-year default dropped below 400 basis points.
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