Pound-Lira Rate Could Struggle at 12.14 Even after CRBT Rate Cut

- GBP/TRY upside limited if USD/TRY holds under 8.80
- Would struggle at 12.14 as GBP tires in rally Vs USD
- But analysts’ bearish TRY views suggest upside risks

Above: CBRT Governor Şahap Kavcıoğlu. Image © CBRT

• GBP/TRY reference rates at publication:
• Spot: 12.05
• Bank transfers (indicative guide): 11.63-11.72
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The Pound-to-Lira exchange rate was on route to late June highs around 12.14 on Thursday following a surprise interest rate cut from the Central Bank of the Republic of Turkey (CBRT), although it could struggle to get above that level if USD/TRY continues to hold below its own recent record high.

Turkish exchange rates fell heavily after the CBRT reduced its benchmark interest rate from 19% to 18% as part of September’s monetary policy decision, a move that many analysts had expected to come only in the final quarter of the year.

At the time of writing the main Turkish exchange rate USD/TRY had been repelled from an earlier attempt at rising above 8.80, which is the record high established in June, and the entire time that this resilience remains it could serve to keep GBP/TRY from rising above its July peak of 12.14.

That’s unless the main Sterling exchange rate GBP/USD is in the meantime able to climb above the 1.38 handle, as GBP/TRY always closely reflects the relative performance of the main Sterling and Lira exchange rates.

However, Thursday’s policy move is an open invitation to the Lira’s doubters and has led some analysts to become more confident about forecasts that new record lows will soon be seen, with USD/TRY widely expected to rise above 8.80 in the weeks ahead.

“Today’s 100bp cut by the CBRT is a moment that was long-feared by investors as this signals that President Erdogan’s preference for low rates has now materialised,” says Ima Sammani, an FX market analyst at Monex Europe, who tips USD/TRY to exceed the 9.00 handle.

Above: GBP/TRY and USD/TRY shown at daily intervals.

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“Turkey has experienced substantially higher inflation than other emerging markets over the last years, as prices have been held up by TRY depreciation, depleted monetary credibility and now also a burst of demand as the economy reopens,” Sammani writes in a Thursday note.

September’s rate cut suggests the CBRT has abandoned a multi-month commitment to keeping the cash rate above the prevailing level of inflation, and the bank appeared to confirm this when omitting the commitment from September’s policy statement, which triggered steep falls in the Lira.

Turkish inflation rose from 18.95% to 19.25% in August, its highest level since 2018, owing to increases in international energy prices and disruptions to global supply chains that have raised the price of goods for almost all countries.

Under the bank’s earlier approach to inflation, any further increases in price pressures could have obliged it to raise Turkey’s interest rate at a time when the CBRT was widely perceived as looking for an opportunity to reduce it.

“While the effects of high global inflation on inflation expectations and international financial markets are closely monitored, Central banks of developed countries consider the rise in inflation to be mostly temporary,” the CBRT said in its statement.

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“In this context, central banks of developed countries maintain their supportive monetary stances and continue their asset purchase programs,” the bank later said, before taking a similar view of the Turkish inflation outlook.

While many in the market were expecting a rate cut to be announced before the year is out, Thursday’s has come sooner than almost all had anticipated and could mean that the Lira is set to come under further pressure in the weeks ahead.

“The lira will be the usual shock absorber,” says Cristian Maggio, head of emerging market strategy at TD Securities. “The CBRT has, however, partly replenished its modest FX reserves buffer, also signing new international swap agreements with foreign central banks or expanding the existing lines.”

Maggio and the TD team forecast the USD/TRY rate to rise to 8.85 by the end of September and to 9.15 by year-end although with the CBRT recently having grown its FX reserves from around $49BN in May to $78BN in August, they anticipate that these losses will be steady and in an orderly fashion.

“This will give the CBRT ammo to support the currency in case of need, but not if the market will go heavily short on the TRY. This consideration suggests that the CBRT will need to tune the pace of easing to market dynamics, possibly suspending easing or reducing its pace when negative currency pressure intensifies,” Maggio wrote in a Thursday research note following the CBRT decision.

Above: GBP/TRY and USD/TRY shown at weekly intervals.