The Turkish lira extended its winning streak to two on Friday, buoyed by the central bank raising interest rates more than what the market had anticipated. The lira had been struggling over the last month following its incredible that started in November. Now that Turkey has shown its willingness to tighten Monetary policy, could the lira break below 7 against the US dollar?

On Thursday, the Monetary Policy Committee (MPC) completed its March meeting. Officials agreed to raise the benchmark one-week repo rate by 200 basis points to 19%, beating the median estimate of 18%. This is the first rate hike since December.

Policymakers noted that the central bank made the decision to tighten policy based on inflation and pricing risks in the broader economy. Last month, the annual inflation rate climbed to a 20-month high of 15.61%, up from 14.97% in January. Until inflation eases and prices stabilize, Additional Monetary Tightening will be implemented.

The MPC has decided to implement a front-loaded and strong additional monetary tightening.

The tight monetary policy stance will be maintained decisively, taking into account the end-2021 forecast target, for an extended period until strong indicators point to a permanent fall in inflation and price stability.

Next week, the MPC meeting minutes summary will be released.

Overall, financial markets are celebrating the decision, with industry analysts noting that Governor Naci Agbal had passed the credibility test, something that the institution had been lacking for quite some time.

Jason Tuvey, the senior EM economist at Capital Economics, wrote in a research note:

Ağbal is clearly keen to embellish his inflation-fighting credentials and thus was willing to go above and beyond what investors had demanded.

Bringing inflation down on a sustained basis will require the central bank to break with the past and move slowly with monetary easing to keep real interest rates high for a prolonged period.

Ankara also reported that foreign exchange reserves came in at $52.66 billion in the week ending March 12. This is down from $53.25 billion in the previous, but it is the ninth consecutive week that forex reserves have topped $50 billion. Still, the weekly figure is hovering around a one-year low.

In other economic data, Turkey’s automobile production plummeted 9.3% year-over-year in February, down from the 3.3% contraction in January.

Over the last month, the lira weakened as much as 5% before renewing its rally against many of its major currency rivals. Before its slide, the lira had been one of the world’s top-performing currencies since November.

The USD/TRY currency pair tumbled 1.09% to 7.2452, from an opening of 7.3246, at 15:07 GMT on Thursday. The EUR/TRY slumped 1.34% to 8.6101, from an opening of 8.7275.

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Post tags: EUR/TRY, Foreign Reserves, Inflation, Interest Rates, Lira, Monetary Policy Committee, Turkey, USD/TRY

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