Turkish Lira Holds Devaluation Pace after TCMB Intervention

The Turkish lira depreciated to a record low of 47.2 per USD in July, maintaining the controlled and slow devaluation rate by the Central Bank of Turkey as it intervenes in foreign exchange markets to prevent a slide. The TCMB held its key policy rate unchanged for the fourth straight decision in July, as expected by markets. The central bank also flagged that leading indicators had already pointed to a pickup in underlying inflation this month due to the fresh surge in energy prices, triggered by escalation in the Middle East war. The bank also warned that domestic demand was seen slowing due to the developments. The central bank had continued to sell liras in the open market to maintain the steady pace of devaluation. Support for the currency was also seen with policymakers downplaying an imminent return to one-week repo auctions, which has been suspended since March, forcing financial institutions to use the more expensive overnight rate.

The Turkish lira topped 46 per USD in June, hitting a new high and extending its gradual, managed depreciation, leaving the currency down around 7% year-to-date. Authorities have maintained this approach since 2023, when Mehmet Simsek assumed office as Minister of Treasury and Finance and shifted policy towards a more orthodox economic framework aimed at stabilisation. The central bank’s disinflation strategy has largely relied on preserving a degree of real appreciation in the lira, ensuring it does not weaken faster than monthly inflation, supported by foreign exchange interventions. However, the recent energy shock triggered by the war with Iran poses a risk to the disinflation path. Inflation rose for a second consecutive month to 32.61% in May, with Turkey remaining a major importer of oil and gas. On a monthly basis, inflation nevertheless eased to 1.7% from 4.2%, encouraging the central bank to keep interest rates unchanged for a third consecutive time in June.

The Turkish lira fell past 45.5 per US dollar in mid-May, hitting a fresh record low after the central bank signaled that disinflation will be slower than previously expected amid energy and food price shocks linked to the Middle East conflict. This comes against the backdrop of a disinflation strategy that relies on maintaining a degree of real appreciation in the lira, aiming to prevent currency depreciation from outpacing inflation and gradually anchor price stability. However, this approach is under strain as inflation pressures remain elevated. Policymakers now project end-2026 inflation at 26%, above the 15%–21% forecast range set in February. Consumer prices also rose 4.18% month-on-month in April, pushing the annual inflation rate to 32.37%, a six-month high and above market expectations of 31%. In response, the central bank has kept its policy rate at 37% for two straight meetings but has effectively tightened liquidity by lending at a higher 40% rate since the conflict began.