The lira experienced turmoil this week, leading the central bank to increase the overnight lending rate from 45% to 46%.
To manage market volatility, FX liquidity measures have been introduced. Furthermore, monetary policy may be tightened if a sustained increase in inflation is anticipated.
Currently, the USD/TRY exchange rate is near 37.80.
Impact Of Interest Rate Hike
Such moves rarely occur in isolation. A rate hike of this nature does not merely attempt to steady the currency—it directly shapes cost structures across industries, influences borrowing decisions, and alters return expectations for investors with exposure to the region. When policymakers adjust interest rates, they are not only responding to present conditions but also guiding expectations for inflation, credit availability, and economic growth.
By raising the overnight lending rate, officials are making it more expensive for banks to access short-term funding. This, in turn, tightens liquidity, which can limit excessive speculation in foreign exchange markets. The additional FX liquidity measures suggest ongoing efforts to prevent disorderly movements in the lira. If these steps are insufficient, further policy responses could follow, particularly if inflation pressures do not ease.
With the exchange rate hovering around 37.80 against the US dollar, price movements must be observed closely. If depreciation persists, costs for businesses reliant on imports increase, while external debt burdens become harder to manage. On the other hand, an adjustment in interest rates does not immediately re-anchor expectations—it takes time for shifts in policy to feed through to broader market conditions.
Future Policy Considerations
Given that authorities have already demonstrated willingness to act, future adjustments remain on the table. If inflation does not stabilise, borrowing costs can rise again. A proactive stance has already been signalled, and any signs of persistent instability will serve as a prompt for further action.
Movements in the lira influence more than just domestic markets. External investors watching these developments must consider how tightening measures affect capital flows. Rapid shifts in interest rates create opportunities but also carry heightened levels of uncertainty for those with exposure to currency fluctuations.
In the days ahead, market participants would do well to factor in not just immediate policy decisions but also how sentiment might evolve as new economic data emerges. Fluctuations in the exchange rate often reflect broader reactions to monetary signals, and abrupt shifts should not be dismissed as mere noise.
