Turkey’s lira hit its strongest level since August on Friday and cemented its position as the top performing currency in the world this year, after the central bank governor told Reuters that interest rates were unlikely to be cut for a “long time”.
In his first interview since taking the job in early November, Naci Agbal said “It does not seem possible to put interest rate cuts on the agenda for a long time this year,” adding that they could also be raised again if necessary.
The comments boosted the lira by more than 0.7% to 7.09 against the dollar from 7.14 late on Thursday. That extended its gain against the dollar for 2021 to nearly 5%, albeit after an unbroken eight-year slide.
“The recovery narrative in Turkish assets has been strengthened by the governor’s remarks,” said Societe Generale emerging market strategist Phoenix Kalen.
She said Agbal’s comments reaffirmed that the central bank, which in recent years has often bowed to political pressure to cut interest rates, now wanted to keep them high to get inflation under control.
Under Agbal, the bank has raised rates to 17% from 10.25%, giving Turkey the tightest monetary policy of any major developed or emerging market economy.
Agbal also said that the bank wanted to gradually rebuild its depleted foreign reserves. Kalen said this “sounds like a sensible plan to reverse one of Turkey’s key external vulnerabilities”.
With the lira gaining, key forex market volatility gauges are now at their lowest levels since late July. Turkish government bonds extended rises that have seen most leap roughly 20% since early November.
“The interview was pretty clear about the outlook for rates, at least for the next 12 months,” said Kieran Curtis at Aberdeen Standard Investments
“We have definitely seen some (investment) flows going back into Turkey in the weekly data and reserves are going up, so we are turning to a more positive scenario.”
Reporting by Tuvan Gumrukcu and Ali Kucukgocmen in Istanbul and Karin Strohecker and Marc Jones in London; Editing by Jonathan Spicer and Kevin Liffey