The Turkish lira firmed Friday to its strongest level in seven weeks, notching a weekly gain of some 12%, after President Recep Tayyip Erdoğan pledged to adopt a new economic model and upon expectations of a sharp rate hike from the Central Bank of the Republic of Turkey (CBRT).
The lira hit 7.6150 to the dollar in morning trade, its firmest level since Sept. 25. It subsequently eased back to 7.6700 by 8:25 a.m. GMT from Thursday's close of 7.6625.
The currency’s rally this week, after touching a record low of 8.58 last Friday, was sparked after Erdoğan pledged a new economic growth strategy on Wednesday based on stability, lower inflation and international investment.
He said the strategy would be built on price, monetary and financial stability and would enable an improved investment climate for foreign investors backed by an efficient judicial system.
On the other hand, the CBRT is seen raising its policy rate next week to 15% from 10.25%, a Reuters poll showed.
Bankers say foreign investors are leading the purchase of Turkish assets on optimism about economic policy changes.
“In a scenario where locals are also on the sell-side (for dollar holdings), we see a high probability for a tendency to a trend between 7.53-7.73” in the dollar-lira exchange rate, said Orkun Gödek, a strategist at Deniz Invest.
The CBRT raised its policy rate by 200 points in September but held steady last month. The bank's use of backdoor policies, funding the market above the policy rate, has brought the weighted average cost of funding to 14.46% as of Thursday.
Former Finance Minister Naci Ağbal was named the CBRT governor Saturday and former deputy Prime Minister Lütfi Elvan was named finance minister late on Monday.
Former Treasury and Finance Minister Berat Albayrak resigned late Sunday, citing health concerns and Erdoğan officially accepted his resignation Monday.
Ağbal said Monday the bank’s main goal is to achieve and maintain price stability and it will "decisively" use all policy tools in pursuit of this aim. He said current financial situations and expectations will continue to be reviewed until the central bank's next policy meeting, set for Nov. 19.
The lira also firmed sharply against the euro this week, to as much as 8.9823 on Friday.
Turkey’s economy has been recovering after a contraction of 9.9% year-on-year in the second quarter due to restrictions aimed at slowing the spread of the coronavirus. It had grown by 4.5% in the previous three months.
Industrial production jumped 8.1% year-on-year in September, data showed Friday.
A rate hike could stall the economy’s rebound from the coronavirus fallout but could help avert a broader balance of payments problems by boosting the lira.
