TRY plunges as CBRT unexpectedly leaves rates unchanged

Summary:

• Turkish central bank leaves its all interest rates untouched
• TRY plunges across the board, CBRT blames volatility in food prices for the recent upsurge in inflation
• USDTRY and EURTRY bounce off their crucial technical supports

In defiance of expectations the Turkish central bank decided to keep all interest rates untouched sending the lira much lower. The local currency plunged over 3% immediately after the release, and taking into account the latest developments one may suppose that it could keep bleeding.

The yield on the Turkey’s 10Y bond spiked as the central bank backed away from hiking rates. Source: Bloomberg

The one-week repo rate was held at 17.75% whereas economists surveyed by Bloomberg had forecast a 100 basis points increase. Other interest rates were left untouched as well. As a result the TRY plummeted along with bond prices, and the latter move has been perfectly pictured at the chart above. The 10Y yield surged out of the blue from 17% to above 17.7% substantially lifting borrowing costs for the government. Let us notice that shortly after the general elections in Turkey there were quite upbeat moods with regard to the future monetary policy course. After a while, it turns out that these optimism was too early. In the meantime Recep Erdogan named his son-in-law the economy minister and reiterated his unorthodox view suggesting that the domestic economy needs lower rates. It resulted in another selling wave on the TRY, and today’s decision only aggravated the lira’s backdrop.

In the statement released on the CBRT’s website one can read that the bank perceives the recent upsurge in inflation as an effect of costa factors and volatility in food prices. Surprisingly, even as the bank admitted that elevated levels of inflation and inflation expectations continued to pose risks on the pricing behaviour it chose to held off on raising rates. On the other hand, the bank could see at the currency monetary settings as sufficiently tight as it assessed that "it might be necessary to maintain a tight monetary stance for an extended period". This could be a possible bearish signal for the TRY suggesting the bank might keep rates on hold until it sees a turnaround in inflation (however, notice that if inflation accelerates on the back of the depressed exchange rate the bank might be compelled to hike rates again, but then it could be too late and much larger increases might be needed). To sump up, investors’ confidence to Turkish monetary policy authorities is unlikely to be restored any time soon.

USDTRY bounced off its crucial technical support and the pair might keep pushing toward sub-5.00 once again. Source: xStation5

The TRY may suffer even more against the shared currency as the EURUSD seems to gets back its appeal. The knee-jerk move sent the cross close to its record high, and given the environment surrounding the Turkish economy one may anticipate this level to broken. Source: xStation5