Turkish lira reaches all-time low prior to interest rate announcement

The Turkish lira on July 18 depreciated by over 2 percent, reaching a new historic low against the dollar. Market concerns arose as there were concerns that the central bank might implement a smaller interest rate hike than anticipations on July 20.

Wednesday July 19 2023 11:35 am

People queue at a currency exchange booth in Istanbul, Turkey July 18, 2023. REUTERS/Dilara Senkaya

Reuters

The lira hit a record low of 26.9 against the U.S. currency, sliding from July 17's close of 26.3505. It has weakened 30% so far this year.

According to a Reuters poll, Turkey's central bank is expected to raise its policy rate by 500 basis points to 20% on July 20, making good on its pledge of further tightening to curb inflation, which is set to rise again.

However, prominent Hurriyet newspaper columnist Abdulkadir Selvi wrote on Tuesday that his impression from "economic circles" was that the rate will be raised to around 16.50-17.0%.

The central bank will announce its rate decision at 1100 GMT on Thursday.

"News saying that the central bank's interest rate hike will be below market expectations is triggering the lira depreciation," said one trader.

"Gradual interest rate hikes were already a difficult path, but concern in the market that the increases might not be enough has started to be reflected clearly in prices," he added.

In June, the central bank raised its policy rate by 650 basis points 15%, promising to continue tightening until there was a significant improvement in the inflation outlook.

The rate hike and the hawkish tone were the strongest signals of a reversal after years of loose policy under President Recep Tayyip Erdoğan, who prioritised growth and investments.

But June's hike was below expectations, with economists saying Erdoğan's influence over the central bank limits how far they can go in tightening policy. Real rates are deeply negative.

Turkey's annual inflation surged to a 24-year high of 85.51% last October, mainly due to lira depreciation because of Erdogan's policy of low rates. It eased to 38.21% by June but is expected to rise again.