Turkish lira hits record low ahead of rate decision

The Turkish lira weakened more than 2 per cent to a fresh record low against the dollar on Tuesday over market concerns that the central bank might raise interest rates this week by less than previously expected.

The lira hit a record low of 26.9 against the US currency, sliding from Monday’s close of 26.3505. It has weakened by 30 per cent 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 per cent this week, 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 per cent.

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 per cent, 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 Tayyip Erdogan, who prioritised growth and investments.

But June’s hike was below expectations, with economists saying Erdogan’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 per cent last October, mainly due to lira depreciation because of Erdogan’s policy of low rates. It eased to 38.21 per cent by June but is expected to rise again.