The 475 basis point increase in Turkish interest rates to 15% caused the currency to rise by 2%.

The dollar stands at 7.56 pounds and the euro at 9 pounds.

Naci Agbal, the new governor of turkey's central bank, decided to hit hard to counter inflation and restore confidence in the currency. The one-week repo rate was raised by 475 basis points to 15%, the highest level in emerging markets. Markets were expecting monetary tightening to be 400 basis points lower. The central bank warns that further monetary tightening is to be expected as long as inflation persists.

The Turkish currency rose after this announcement. The dollar fell 2%, from 7.71 to 7.56 pounds, and the euro fell 1.4%, from 9.11 to 9 pounds. "It was better for the new governor to strike hard to deliver the final blow to those who bet on the fall of the pound. If he has obtained this time the authorization of President Erdogan to raise interest rates, it is not certain that this will be the case in the future, "said Timothy Ash, strategist at Bluebay in a view published by the agency P.A. Turkey. On the eve of the central bank meeting, President Erdogan said that "we should not let our investors be crushed by high interest rates."

Erdogan and single-digit inflation

He added that "our goal is to achieve single-digit inflation as soon as possible." The price increase is currently in the order of 12%. "Industrial production grew by 7.5% in the third quarter and year-on-year," said Robin Brooks, chief economist at the Institute of International Finance. Growth is expected to be stable this year, a much better performance than most emerging markets. Tighter monetary policy will weigh on activity in 2021, but the benefit will be a more stable currency and more sustainable and less volatile growth. Before the dismissal of the governor of the Turkish central bank and the resignation of the finance minister, the consensus of economists forecast GDP growth of 4.5% next year.

The return of foreign capital to Turkish markets will promote the rebound of the currency. In the next twelve months the bank Goldman Sachs anticipates a 15% rise in Turkish equities, an increase half that expected for their Brazilian, Mexican and Colombian counterparts. The US bank remains pessimistic about the evolution of the Turkish currency in a scenario of uncontrolled inflation (13.4% in 2021). It forecasts a 20-25% fall in the Turkish currency within three to twelve months. The dollar would be between 9.25 and 9.50 Turkish lira.

"Border" currency

"After the 2008 financial crisis, the Turkish lira behaved like other risky emerging currencies . This was no longer the case this year, its behavior was that of a currency of the 'frontier' markets [the less developed markets that have not yet reached the status of emerging markets, Editor's note], with periods of very low volatility punctuated by sudden movements," notes Goldman Sachs. This downgrading of the Turkish currency is linked to the weakening of the central bank, under the influence of political power, and to repeated massive interventions in the foreign exchange market. Despite its rebound, the real exchange rate of the Turkish lira is still half its level of a decade ago. This is the worst performance behind the Brazilian real and South African rand.

Hedge funds and asset management companies contributed the most to the 10% rebound in the Turkish lira in the week following Naci Agbal's appointment, according to Citi. Hedge funds have also massively bought Hungarian forints and Polish zlotys. Banks took advantage of the rebound in the Turkish lira to give in. This was also the case for companies, but to a lesser extent.

Nessim Aït-Kacimi