Turkish Lira Tests Fresh Record Low of 7.9 As Central Bank Leaves Rates Unchanged

The Turkish lira tested a fresh record low of 7.9 to close out the trading week, one day after the central bank surprised analysts and left interest rates unchanged. The lira has repeatedly been cratering to new all-time lows throughout 2020, driven by declining foreign exchange reserves and geopolitical tensions. Could the lira break 8.0 against the US dollar in the coming weeks?

On Thursday, the central bank announced that it would keep its benchmark repo rate at 10.25%. The market had penciled in a rate hike of 175 basis points, with some analysts calling for a 200-basis-point hike. But policymakers chose to hold rates steady, potentially because it would give them room to increase its average lending rate without officially raising the benchmark rate.
But while the institution refrained from pulling the trigger on a rate hike, officials boosted the upper rate that banks getting loans from the central bank receive. It went up from 13.25% to 14.75%. In recent weeks, the average cost of funding has climbed to as much as 12.5%. Put simply, Ankara is engaged in backdoor tightening, and, according to analysts, global financial markets understand this maneuvering.
The central bank is perhaps also trying to strike a fine balance between policy tightening and appeasing President Recep Tayyip Erdogan, who has been trying to stimulate the economy with low rates.
That said, the consensus among the experts is that Turkey is continuing to damage its credibility, ruin its reputation, and threaten further depreciation in the lira by not engaging in conventional tightening to save its currency. Timothy Ash, an analyst at BlueBay Asset Management, might have summarized the situation in an interview with The Financial Times: The Turkish central bank “never seems to learn.”
Despite the lira tanking in 2020 due to dwindling forex reserves, policymakers insist they possess adequate reserves. Gross FX reserves held by the central bank rose to $42.82 billion in the week ending October 16, up from $41.11 billion in the previous week. Even with the increase, the nation’s forex reserves are standing at their lowest levels in more than 15 years.
In other data, consumer confidence dipped from 82 in September to 81.9 in October.
The USD/TRY currency pair advanced 0.24% to 7.9580, from an opening of 7.9373, at 17:37 GMT on Friday. The EUR/TRY climbed 0.54% to 9.4348, from an opening of 9.3825.
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