Why did the TL drop after the Central Bank rate hike?

TL gained 2.5% vs USD in late Friday trading hours, after coming under immense selling pressure (%8 drop) on the back of suggestions that Erdogan may have not known about the size of the rate hike. Yet another theory is that shorts were covered, while a third suggests the culprit is Powell’s Jackson Hole speech.  PA Turkey has found no press evidence that Erdogan is angry with Central Bank of Turkey. EM FX sold modestly in Lat Am   after Powell speech, which have been amplified in thin TL market .  However, it appears on Friday close Central Bank was once again in firm control of the exchange rate.  Once the initial turmoil winds down, which direction is Turkish Lira heading?


“MSCI’s index of emerging market currencies slipped 0.2% after Federal Reserve Chair Jerome Powell delivered remarks at the Jackson Hole symposium in Wyoming on Friday. Powell signaled it’s still too soon to declare victory over inflation, while saying the Fed “will proceed carefully” on whether to raise interest rates again.

Alejandro Cuadrado, Global Head of FX & Latam Strategy at BBVA, said the remarks reinforced “overall risk sentiment shakiness”, reports Bloomberg, but the volatility in the TL preceded Powell speech, and the late trading strength could have been caused by Central Bank intervention.

Xinhua warns that   “the question still remains whether the latest move of monetary tightening move will tame the rampant annual inflation rate, which stood at 47.8 percent in July, experts say.

Emre Alkin, an Istanbul-based economist and scholar commented: “Tax increases may be necessary, but they will accelerate inflation in the midterm, therefore stoking the cost-of-living crisis, and creating more poverty and hardships for most of the population,” he said in his video blog”

Yet according to a Reuters report, foreign investors are more keen on increasing their TL asset position, which will work towards stabilizing the exchange rate.

At the end, the most plausible theory is  locals and select few London traders covering their short TL positions, having bet on a second underwhelming rate decision.


Central Bank rate hike opens the door to some financial inflows and could– if repeated– allow Turkish banks and corporates borrow more in the September-October FX refi season.  We’d also speculate some high net worth individuals may reduce their FX holdings having more faith in Central Bank brining inflation under control and allowing deposit rates that produce some REAL return.  In other words, from a balance capital flows, TL should stop depreciating.

Yet, the picture from current account is wholly different.  While July-August economic data does point to some economic weakness, PA Turkey expects positive sequential growth in 2-3Q  GDP, while the slow-motion deterioration of the German economy darkens the outlook for exports.  Currently, credit restrictions are used to contain  domestic demand, it is not clear whether this awkward method would be able to reduce domestic demand to the point where current account deficits are easily finance-able without Central Bank intervention.

PA Turkey predicts the currency will fluctuate in a narrow range through October, but winter months may witness more volatility.


PA Turkey Editors

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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.