Turkish lira to strengthen in the mid-term, Rabobank says

Turkey’s lira is expected to gain against the dollar in the medium term after the central bank hiked interest rates, according to Rabobank of the Netherlands.

The central bank’s 4.75 percentage-point rate increase to 15 percent on Thursday has turned the lira into one of the highest yielding currencies in emerging markets.

Demand for lira assets from carry traders, who benefit from differences in interest rates in their home countries and those elsewhere, may now improve, Rabobank said, currency news website FXStreet reported on Thursday.

The lira extended a rally immediately after Thursday’s hike, closing the day at 7.5507 per dollar. The currency had traded at a record low of 8.58 per dollar two weeks ago, just prior to President Recep Tayyip Erdogan’s announcement that he had sacked and replaced the central bank’s governor.

The central bank has simplified monetary policy and it will lend from now on at the single 15 percent rate. Monetary policymakers also indicated that interest rates would remain high for an extended period until inflation converges with the official target.

Annual consumer price inflation in Turkey stands at 11.9 percent. The central bank’s goal in the medium term is to slow price increases to an annual 5 percent.

Rabobank said the next important level for the lira lies at 7.4 per dollar. Should the currency continue to strengthen, more so-called technical levels exist at between 7.23 and 7.26 per dollar, it said.

The lira traded down 0.5 percent at 7.59 per dollar at 10:23 a.m. local time in Istanbul on Friday.