Faith of the Turkish Lira: Can it bounce back?

The USD/TRY exchange rate continued its bullish trend after the divergent paths taken by the Federal Reserve and the Central Bank of the Republic of Turkey (CBRT). It jumped to an all-time high of 18.40, which was about 80% above the lowest level this year.

The USD/TRY has been in a strong bullish trend in the past few years amid rising concerns about the actions of the CBRT. In a statement on Thursday, the Turkish central bank did the unthinkable once again as it slashed interest rates for the second time this year.

The CBRT slashed rate by 100 basis points and pushed the official cash rate to 13%. It was the second straight 100 basis rate cut this year. In total, the bank has slashed by 700 basis points since 2021.

The decision by the CBRT to slash interest rates is awkward because of the state of the Turkish economy. For one, inflation has surged to more than 80%, making it the highest globally. Historically, the monetary theory states that a central bank should hike interest rates in a period when inflation is rising.

The CBRT has an opposite argument. The governor has argued that high-interest rates were fueling inflation by raising the cost of goods. Therefore, analysts believe that the country’s inflation will remain at an elevated level in the coming months, as we wrote here.

At the same time, the benefits of a weak Turkish lira on boosting exports is having diminishing returns since importers are now paying a hefty price. Therefore, there is a likelihood that the USD/TRY will continue rising as long as the CBRT maintains a dovish tone.

The USD/TRY price also continued soaring as investors reacted to the extremely hawkish tone of the Federal Reserve. In our Fed forex news, we wrote that bank hinted that there will be more jumbo rate hikes in the coming months.